Emerging Markets Debt ETFs Look Appealing as Fed Nears Rate Cut | ETF Trends

Investors are increasingly emphasizing seeking emerging markets as a place to allocate capital in 2019, but few offer debt holdings, which makes ETFs like the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) an attractive option. The fund provides this core EM exposure at a modest 0.39 percent expense ratio.

EMB, the largest emerging markets bond fund, is higher by 9% this year and the fund could continue delivering upside as the Federal Reserve nears its first interest rate cut of the year and if the dollar weakens.

“The decisively dovish turn in global monetary policy this year has helped drive bond yields to the bottom of recent ranges,” said BlackRock in a recent note. “We expect low rates to persist, with the Federal Reserve poised to deliver an insurance rate cut soon and the European Central Bank likely to provide additional stimulus by the end of October, opening the door for further global monetary easing.”

BlackRock upgraded its view on emerging markets debt to Overweight. A stabilizing dollar outlook also diminishes the danger of taking on emerging currency exposure, which has historically acted as a large source of volatility for investors investing in local-currency-denominated emerging market debt.

Evaluating EMB ETF

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.

“EM debt comes in two flavors: bonds denominated in the issuer’s local currency and bonds denominated in another currency such as the U.S. dollar, so-called hard-currency debt,” according to BlackRock. “Global central banks’ dovish shift has spurred both types of EM debt to rally, mostly driven by declining global rates.”

The rally in emerging market debt has pulled down yields significantly as bond prices increased, with the yield spreads between emerging market debt and U.S. investment-grade bonds tightening as a result. Nevertheless, the BlackRock strategists argued that emerging market debt yields remain attractive on an absolute and relative basis over the long-term.

For more information on the developing economies, visit our emerging markets category.