So many retirement investors are conditioned to believe that fixed income allocations only mean municipal bonds or Treasuries.
With yields low on those assets and the dollar weak, income investors may want to examine emerging markets bonds, an assets class accessible via multiple exchange traded funds, including the VanEck Vectors Emerging Markets Aggregate Bond ETF (EMAG).
EMAG seeks to replicate the price and yield performance of MVIS® EM Aggregate Bond Index, which is comprised of emerging market sovereign bonds and corporate bonds denominated in U.S. dollars, Euros or local emerging market currencies. The index includes both investment grade and below investment grade rated securities.
“The ICE BofA US High Yield Emerging Markets Corporate Plus Index yields 1.5 percentage points more than the US High Yield Index,” reports Alexandra Scaggs for Barron’s. “That premium comes despite the fact that the emerging-market index is actually rated higher than the U.S. index. The emerging-market index has a BB3 rating, one notch above the U.S. high-yield corporate bonds’ B1 rating, and both have held those ratings since 2005.”
Are Emerging Markets Bonds Right for Your Portfolio?
The combination of emerging markets and junk bonds may appear to be too risky for many income investors, but with the right methodology investors can dial back some of that risk while grabbing access to higher levels of income.
Amid low interest rates in the United States and inklings of the reflation trade taking shape, EMAG is a credible near-term consideration for income-starved investors.
“Another trend that could work in favor of emerging-market bonds, and currencies, is the fact that markets aren’t fully reflecting many countries’ responses to Covid-19, wrote Oxford Economics. As a whole—though there is plenty of variation between countries—emerging markets haven’t lagged that far behind more established economies in their relative damage from the coronavirus pandemic, the firm’s economists wrote in a Feb. 23 note,” adds Barron’s.
In recent years, some yield-starved investors have embraced emerging markets debt as a way of increasing income. As the global economy continues to expand, many will increase consumption of raw materials to fuel the expansions, which in turn would support most of the emerging markets that help supply the raw commodities like oil and metals.
For more on income strategies, visit our Retirement Income Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.