Emerging Market Bond ETFs Gain Momentum in Low-Yield Environment

Markets ETF Trends

Emerging market bond exchange traded funds will continue to strengthen as yield-hungry investors eschew the low and even negative-rates in developed markets.

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Bonds issued by developing countries have arguably benefited from the aggressive central bank policies from developed economies that depressed global yields, the Financial Times reports.

“The only countries in the world that are actually normal — normal monetary policy, normal interest rates — are emerging market countries,” Jan Dehn, an investor at Ashmore, told the Financial Times.

SEE MORE: Attractive Yield Opportunities with Emerging Market Bond ETFs

The negative rate policies out of the European Central Bank and Bank of Japan have pushed down yields in overseas developed markets.

While yields in developed economies remain depressed, with some even trading with negative yields, emerging market bonds have quickly gained traction as one of the few areas left with attractive yields. The JPMorgan global diversified composite index that covers emerging market bonds has increased almost 15% year-to-date.

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“In a world of very low rates, emerging markets shines through as a place where you can get some interesting relative value in a world that is increasingly devoid of it,” Chris Gilfond, an emerging markets origination banker at Citi, told FT.

Moreover, emerging market bonds are also being supported by the strength of local currencies against the U.S. dollar. Emerging market currencies have appreciated after the bouts of extensive weakness last year and a sharp fall off earlier this year, with the JPMorgan emerging market FX index up almost 9% year-to-date.

SEE MORE: It’s Easy to Explain Investors’ Affinity for EM Bond ETFs

Emerging currencies have strengthened on improving commodity prices, notably the rebound in crude oil prices, as many developing economies are major exporters of raw materials.

Consequently, more investors are looking to emerging market yields, despite the risks associated with the developing economies.

“People do want to take much more risk, more corporate, more high-yield, especially EM,” Paul McNamara, investment director at GAM, told FT, adding that one of the issues holding back risk-taking was the Fed’s September meeting.

Investors interested in emerging market bond exposure may consider a number of U.S. dollar-denominated EM debt ETFs, such as the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB). EMB has a 7.18 year duration and a 4.45% 30-day SEC yield.

The PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY) has a 8.97 year duration and a 4.75% 30-day SEC yield.

The VanEck Vectors Emerging Markets Aggregate Bond ETF (NYSEArca: EMAG) has a 4.65 year duration and a 3.94% 30-day SEC yield.

The Vanguard Emerging Markets Government Bond ETF (NasdaqGM: VWOB) has a 6.6 year duration and a 4.13% 30-day SEC yield.

For more information on the fixed-income market, visit our bond ETFs category.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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