A passive index may not give fixed income investors full exposure to the broad spectrum of bonds, including those in emerging markets. Thankfully, there’s a solution for that problem in the actively managed Global X Emerging Markets Bond ETF (EMBD).

EMBD aims to provide investors with strategic exposure to the growing universe of emerging market debt. With a total market size of $26 trillion, emerging market debt represents more than 20% of the global bond market and is a common fixture in income-oriented portfolios.

The fund primarily invests in emerging market debt securities denominated in U.S. dollars, however, the fund may also invest in those denominated in applicable local foreign currencies. Securities may include fixed-rate and floating-rate debt instruments issued by sovereign, quasi-sovereign, and corporate entities from emerging market countries.

EMBD gives investors:

  • Experienced Portfolio Managers: EMBD’s portfolio managers have extensive track records in actively-managed emerging market debt strategies.
  • Competitive Cost: At a 0.39% total expense ratio, EMBD offers the outperformance potential and risk management of active portfolio managers, at a competitive cost. EMBD is up 6% within the past year.
  • High Yield Potential: By targeting emerging market debt securities, EMBD aims to offer high yields with low correlations to other fixed income securities.

EMBD Chart

Are Passive Investors Left in the Cold?

An active management strategy like that in EMBD allows managers to dynamically shift exposure to and from debt from various parts of the globe. It can also reach corners of the EM bond market that aren’t necessarily accessible in passive index strategy.

“Passive investors in emerging market bonds have access to only a fraction of available securities, resulting in a lack of diversification and the potential that damaging inflows and outflows will be intensified, analysis suggests,” a Financial Times article said. “Research from Ashmore, a specialist EM investment house, has shown that just 13 per cent of the $29.6tn stock of outstanding emerging market bonds are currently included in the major flagship bond indices that are tracked by exchange traded funds and other passive investments.”

This, in turn, gives bond investors minimal exposure to EM debt.

“As a result, passive money will be concentrated in this relatively narrow subset rather than being spread across the wider universe,” the article added. “While the figure is an increase on a 9 per cent inclusion rate two years earlier, largely due to China’s admission into the major EM fixed income indices, it still leaves $26tn of bonds out of reach.”

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