However, despite this growth, challenges still exist when investing in emerging market debt, Isenberg warned, specifically pointing to risks like investability concerns, credit risk and rate sensitivity. There may be many small countries and bonds that do not necessarily impact returns but can significantly impact transaction costs. A number of so-called debt crisis have littered the developing economies over the years, serving to warn investors of some of the inherent risks associated with emerging markets. Emerging market debt has also seen credit ratings improve over the years, which has allowed many to issue longer dated debt that would extend the duration of their bonds. When investors want to diversify and potentially tap into the high-yield opportunity of emerging market debt, these things need to be factored in.
J.P. Morgan has tried to make the emerging market bond investment process easier with the the recently launched JPMorgan USD Emerging Markets Sovereign Bond ETF (NYSEArcaL: JPMB), which tries to reflect the performance of the rules-based JPMorgan Emerging Markets Risk-Aware Bond Index, includes liquidity, risk and credit screens to filter out some of the more questionable debt securities in an inherently riskier global market segment.
Through this alternative weighting approach, the index seeks to provide better risk-adjusted returns compared to traditional market cap-weighted indexing and to potentially generate a competitive yield with lower levels of duration for investors.
While JPMB is new and some traders may be loath to execute large orders on a relatively slowly traded vehicle, Ryan Szakacs, Vice President of ETF Capital Markets for J.P. Morgan Asset Management, explained that financial advisors ore investors seeking large trade orders may work with their trading desks or J.P. Morgan’s capital markets team to push through efficient trades. The ETF’s true liquidity reflects its underlying markets, which is comprised of 93% sovereign debt and 7% quasi-sovereigns, with a daily capacity of $300 million.
Szakacs also explained some best practices for pushing through a trade order, such as utilizing limit orders to improve pricing, especially when the secondary market liquidity is a concern. Investors should also avoid trading at the open or close of market trading as the first and last 15 minute periods of the day are usually more volatile.
Financial advisors who want to learning more about the EM debt market can watch the webcast here on demand.