With EM Bonds, Selectivity Matters | ETF Trends

Emerging markets bonds, both of the dollar-denominated and local currency varietals, have followed broad measures of domestic debt lower this year. However, some corners of the developing fixed income space show signs of strength. This prompted experts to say investors should not ignore the asset class as a whole.

While not a risk-free bet, emerging markets debt offers a variety of opportunities for tactical fixed income investors, some of which can be tapped via exchange traded funds such as the VanEck J.P. Morgan EM Local Currency Bond ETF (EMLC). EMLC follows the J.P. Morgan GBI-EM Global Core Index and turns 14 years old in July.

The ETF could prove pertinent at a time when some market observers are pointing to opportunities with local currency debt and lower-rated bonds. On the latter point, the consensus isn’t that investors should take on significant credit risk with emerging markets bond. Rather, lower investment-grade and higher junk-rated fare could reward investors. EMLC answers that call. More than 52% of its holdings have BBB or BB ratings.

EMLC Could Be Sturdy

Indeed, volatility in terms of the U.S. economy and interest rates as well as geopolitical headlines are issues that could affect emerging markets bonds as 2024 moves along. However, EMLC has the ingredients to potentially capitalize should the outlook for this asset class turn more sanguine.

“Together with a continued dearth of new EM sovereign and corporate bonds, we expect the relatively attractive yields offered by EM bonds to both add some downward pressure on yield spreads and act as a counterweight against higher yields should economic or political news provoke shorter- term volatility,” according to BNP Paribas.

Of course, regional allocations matter with ETFs such as EMLC. Asia is usually the largest regional fixture in emerging markets ETFs, equity, and fixed income. However, investors should consider that opportunities abound in Latin America.

EMLC allocates nearly 14% of its roster to Brazil and Mexico, Latin America’s two largest economies. Colombian and Peruvian debt combine for about 10% of the fund’s portfolio. Three other Latin American nations are represented in the ETF. Add it all up and EMLC is positioned to capitalize on declining inflation and lower interest rates in that region.

“Inflation continues to normalize across the EM regions, supporting the outlook for more accommodative domestic monetary policy and lower bond yields. We expect Latin America to remain the leader in implementing rate cuts and believe the bulk of the expected cuts will materialize in 2024,” added BNP Paribas.

For more news, information, and analysis, visit the Beyond Basic Beta Channel.