A Pair of Emerging Market Bond ETF Options to Consider

When the Covid-19 pandemic started to take its toll on the capital markets in early 2020, the emerging markets (EM) space was one of the hardest hit. Now, as investors regain confidence in EM, one of the areas they can look at for opportunities in the debt market is EM bonds in ETFs like the VanEck Vectors Emerging Markets Aggregate Bond ETF (EMAG) and the VanEck Vectors EM High Yield Bond ETF (HYEM).

Whether it’s to diversify bond exposure or for income purposes via higher yields, both funds can give ETF investors the EM debt exposure they’re looking for. EMAG is up 8% in the past six months while HYEM is up 6%.

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.

EMAG Chart

EMAG data by YCharts

HYEM seeks to replicate the ICE BofAML Diversified High Yield US Emerging Markets Corporate Plus Index, which is comprised of U.S. dollar-denominated bonds issued by non-sovereign emerging market issuers that have a below investment grade rating and that are issued in the major domestic and Eurobond markets.

Fund facts:

  • Focuses solely on the non-sovereign segment of the high yield emerging markets bond market
  • Currently lower average duration versus high yield U.S. corporate bonds
  • Lower historical default rates compared to high yield U.S. corporate bonds

HYEM Chart

HYEM data by YCharts

EM to Follow Global Rally?

As global economies around the world rally, EM will eventually follow, which bodes well for EMAG and HYEM. Per a Bloomberg article, “The fact remains though that with central-bank stimulus efforts and vaccine roll-outs providing comfort, most investors are confident the rally has further to run.”

“Emerging-market economies will post an average fourth-quarter growth rate of 2.2%, according to a Bloomberg survey, though many see the efficacy of inoculation programs as a key driver for sentiment,” the article added further. “The World Bank’s Global Economic Prospects report on Tuesday is set to provide further clues on the pace of recovery.”

“Markets are naturally forward-looking, so we have seen a strong rally despite the dark winter with restrictions still in place in many countries,” said Trieu Pham, a strategist at ING Groep NV in London. “We remain constructive going in early 2021, with hopes that we turn a page on the Covid-19 issue and with major central banks remaining dovish.”

For more news and information, visit the Tactical Allocation Channel.