Political Risk Looms For EM Bond ETFs

In search of higher yields, many investors have been embracing ETFs holding emerging markets bonds this year, a theme benefiting funds such as the iShares J.P. Morgan USD Emerging Markets Bond ETF (NASDAQ: EMB).

EMB tracks the J.P. Morgan EMBI Global Core Index, a market-cap-weighted index. Potential investors should note that since it is a cap-weighted index, countries with greater debt will have a larger position in the portfolio. EMB is now the world’s largest emerging markets bond fund, ETF or mutual fund.

Emerging markets bond funds denominated in local currencies have been popular with yield-starved investors this as the U.S. dollar has been in a funk for most of this year. Year-to-date inflows to emerging markets bond funds have already set an annual record. However, investors’ affinity for developing world debt could be challenged in 2018 amid a slew of elections that could spark increased political volatility.

“Countries that make up more than 50 percent of a Bloomberg Barclays developing-nation local bond index are gearing up for elections in the next 12 months,” reports Bloomberg. “While the outcomes of votes in countries like Russia are predictable, tight contests in heavyweights like Brazil and Mexico have potential to cause bouts of volatility. That may catch some investors off-guard after they piled into emerging-market assets this year in search of higher returns as yields in developed markets grind ever lower.”

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