Emerging market bonds are fixed income debt that is issued by countries with developing economies as well as by corporations within those nations. While they do carry some heightened risk parameters, these bonds and their associated funds have become increasingly attractive to investors, constituting a larger portion of investment portfolios in recent years. Their traction has been ascribed to the bonds’ rising credit quality and their higher yields, relative to U.S. corporate and Treasury bonds.
Today, bonds can be issued from developing nations and enterprises all over the globe, including Asia, Latin America, Eastern Europe, Africa, and the Middle East. Emerging market debt is also offered in a wide assortment of derivatives as well as short and long duration bonds.
For investors looking to explore an emerging market bond allocation in their portfolio, the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) is a popular choice.
The iShares J.P. Morgan USD Emerging Markets Bond ETF seeks to track the investment results of an index composed of U.S. dollar-denominated, emerging market bonds. EMB offers investors exposure to U.S. dollar-denominated government bonds issued by emerging market countries. The fund provides access to the sovereign debt of more than 30 emerging market countries in a single fund, and gives investors the chance to seek a higher yield and customize their emerging markets allocations.
In the emerging market bond ETF space, the iShares JPMorgan USD Emerging Markets Bond Fund (NYSEArca: EMB) is the largest option available, with about $15.4 billion in assets under management. The fund tries to reflect the performance of the J.M. Morgan EMBI Global Core Index, which is market-value-weighted based on countries with the most debt and is comprised of U.S. dollar denominated emerging markets bond securities.
EMB has a 0.39% expense ratio, a 3.68% 30-day SEC yield, average maturity of 12.1 years and an effective duration of 7.7 – each 1% rise in rates will diminish EMB’s price by about 7.7%.
Credit quality allocations include AA 1.7%, A 6.0%, BBB 46.7%, BB 15.7% and B 13.4%. Country allocations include Brazil 7.4%, Russia 7.1%, Mexico 7.0%, Philippines 6.8%, Turkey 6.7%, Indonesia 6.5%, Venezuela 4.9%, Colombia 4.9%, Peru 4.2% and Poland 4.1%.
Upside in Emerging Markets?
For investors looking for the continued upside in emerging market assets, whether driven by a weakening USD or continued developments around trade, the Direxion MSCI Emerging Over Developed Markets ETF (NYSEArca: RWED) offers them the ability to benefit not only from emerging markets potentially performing well, but from emerging markets outperforming developed markets.
Conversely, if investors believe that resolutions to the big issues impacting sentiment today are in motion, the Direxion MSCI Developed Over Emerging Markets ETF (NYSEArca: RWDE) provides a means to not only see developed markets perform well, but a way to access a convergence/catch-up in performance of DM relative to EM, a spread that has clearly widened over the past 6 months.
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