The recent weakness in the U.S. dollar and stronger EM currencies have helped bolster demand for emerging market assets, including bonds. Those themes are benefiting ETFs, such as the iShares J.P. Morgan USD Emerging Markets Bond ETF (NASDAQ: EMB). However, some investors are departing the popular bond fund.
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.
After adding about $2 billion in new assets last month, making it one of the top asset-gathering bond ETFs, EMB recently suffered departures.
“The largest exchange-traded fund tracking emerging-market dollar debt posted its biggest daily outflow on record on Monday amid a global retreat from risk assets,” reports Bloomberg. “Investors pulled $444 million from the iShares J.P. Morgan USD Emerging Markets Bond ETF, according to data compiled by Bloomberg. The outflow adds to the highest weekly withdrawals from the fund since July last year.”
Last year, 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.
Colombia, Indonesia, Malaysia and South Africa are among the emerging markets holding elections next year. Those countries combine for about 14% of EMB’s roster.
Votes in countries like Russia are more predictable, but a tight race between heavyweight contenders like Brazil and Mexico could trigger rounds of greater political risk-induced volatility in the emerging markets, or shake up emerging market bond exposure that some fixed-income investors have taken this year in search of yield.
Mexico has general elections in July, Malaysia has general elections in August, Brazil has general elections in October and Thailand has general elections in November.
For more information on the developing economies, visit our emerging markets category.