The performance of emerging markets exchanged-traded funds (ETFs) have been marred by the trade wars between the U.S and China, such as the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO)–down 7.67% YTD, iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG)–down 7.3% YTD and iShares MSCI Emerging Markets ETF (NYSEArca: EEM)–down 7.78% YTD. Nonetheless, there can be emerging markets opportunities had in fixed income, especially when it comes to Asia.
“There are huge opportunities for fixed income in all global regions at the moment, particularly in Asia,” said Michael Paulus, Managing Director at OpenDoor Securities. “Infrastructure needs as well as rapidly increasing wealth in the region are helping to drive the issuance. While Asian markets are not nearly as developed as those in the U.S. and Europe, technology innovation there is being developed rapidly, and regulators and local governments are taking a more proactive look at how these technologies can be incorporated into bond markets.”
Related: MSCI Emerging Markets Index Down Almost 9% YTD
The Singapore Exchange infused a $53 million investment in U.S. trading-venue operator Trumid, which signals the confidence in the Asian bond markets. This could open the doors for similar investments to encourage more electronic trading in the fixed-income space.
“There is growing interest from Asian policy-makers and regulators to encourage electronic trading,” Paulus said. “Players in Asia-Pac are becoming increasingly focused within the region. As these Asian markets develop, there is greater flexibility to adopt new technologies and trading platforms as the incumbents are not as entrenched as they are in Europe and North America.”
Investors can get access to the Asian bond markets with broad-based exposure to emerging markets fixed-income ETFs, such as the VanEck Vectors JP Morgan EM LC Bond ETF (NYSEArca: EMLC), Invesco Emerging Markets Sovereign Debt ETF (NYSEArca: PCY) and the SPDR Bloomberg Barclays Emerging Markets Local Bond ETF (NYSEArca: EBND). These ETFs will incorporate debt issues from certain Asian countries, depending on the fund, but also provide exposure to debt markets in other parts of the globe.
EMLC seeks to replicate the price and yield performance of the J.P. Morgan GBI-EM Global Core Index, which is comprised of bonds issued by emerging market governments and denominated in the local currency of the issuer. It may concentrate its investments in a particular industry or group of industries to the extent that the index concentrates in an industry or group of industries.
PCY seeks to track the investment results of the DBIQ Emerging Market USD Liquid Balanced Index. The fund generally will invest in U.S. dollar-denominated government bonds from emerging market countries that comprise the underlying index, which measures potential returns of a theoretical portfolio of liquid emerging market U.S. dollar-denominated government bonds.
EBND seeks to provide investment results that correspond generally to the price and yield performance of the Bloomberg Barclays EM Local Currency Government Diversified Index, which is designed to measure the performance of the fixed-rate local currency sovereign debt of emerging market countries.
Investment-Grade Corporate Bond ETF Options
As opposed to investing in the bond themselves, investors can look for similar exposure within investment-grade corporate bond ETF options like the iShares 1-3 Year Credit Bond ETF (NASDAQ: CSJ), ProShares Investment Grade—Intr Rt Hdgd (BATS: IGHG) and the Xtrackers Inv Grd Bd Intst Rt Hdg ETF (BATS: IGIH). All three reduce credit risk exposed to investors with debt holdings in investment-grade paper.
CSJ tracks the investment results of the Bloomberg Barclays U.S. 1-3 Year Credit Bond Index where 90 percent of its assets will be allocated towards a mix of investment-grade corporate debt and sovereign, supranational, local authority, and non-U.S. agency bonds that are U.S. dollar-denominated and have a remaining maturity of greater than one year and less than or equal to three years–this shorter duration is beneficial during recessionary environments.
IGHG tracks the performance of the Citi Corporate Investment Grade (Treasury Rate-Hedged) Index with long positions in investment grade corporate bonds issued by both U.S. and foreign domiciled companies. This is particularly important during market downturns when the propensity for a company to default on its debt is higher. As such, IGHG focuses on investment-grade issues to reduce credit risk.
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