For the Brave, EM Bond ETFs Offer Opportunity
September 9, 2013

Recent signs of life aside, 2013 has not been a pleasant year in which to be long emerging markets stocks or equity-based ETFs. Owning developing market bond funds has not been a picnic either. Year-to-date, the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) has lost 11%, or nearly triple the 2013 loss endured by the iShares Core Total U.S. Bond Market ETF (AGG).

The struggles of EMB and local currency funds like the iShares Emerging Markets Local Currency Bond ETF (LEMB) have prompted tens of billions of dollars have been pulled from emerging markets bond and equity funds this year, but amid those outflows and mostly unfavorable views of emerging markets debt, some see opportunity with the asset class. [Retail Investors Dumping EM Bond ETFs Faster Than Pros]

Many developing countries still offer room for higher credit ratings and stronger balance sheets than their developed world peers. On the basis of debt-to-GDP ratios, “developed markets have a debt/GDP ratio of about 80%, compared with just 40% for emerging markets,” Joe Light reported for the Wall Street Journal, citing Chris Brightman, head of investment management at Research Affiliates.

Brightman told the Journal that for investors with little or no exposure to emerging markets debt, now could be a good time to start building positions in the asset class. Although some emerging markets equity funds have been moving higher in recent weeks, bond funds are still hampered by the specter of Fed tapering. In the past month, LEMB is down 3.4% while the rival Market Vectors EM Local Currency Bond ETF (EMLC) has lost 4.6%. [Taper Talk Pummels Local Currency Bond ETFs]

Investors are proving to be reluctant in warming to emerging markets debt again. Barclays data show over $2 billion was pulled from emerging markets bonds ETFs during the last week of August, up from $1.3 billion in the prior week. Local currency bonds “tend to have shorter maturities than U.S.-dollar bonds, which means they won’t be hurt as much if rates rise,” according to the Journal.

Favorable views of emerging markets debt jibe with comments made by PIMCO last month. “Continuing vulnerabilities in global growth suggest there is fundamental value in EM bond yields at present valuations, as interest rate hikes priced into EM yield curves are unlikely to materialize in an environment of tentative growth,” the world’s largest bond manager said in a commentary.

iShares Emerging Markets Local Currency Bond ETF

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of EMB.

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.