Emerging Market Bond ETFs Yielding 5% After Rate Sell-Off

ETF Trends

Some emerging market bond ETFs are offering yields of 5% or more after the recent sell-off, enticing investors who remain hungry for income.

Funds in the category include iShares J.P. Morgan USD Emerging Markets Bond Fund (EMB), PowerShares Emerging Markets Sovereign Debt Fund (PCY), WisdomTree Emerging Markets Local Debt (ELD), Market Vectors Emerging Markets Local Currency Bond (EMLC) and SPDR Barclays Capital Emerging Markets Local Bond (EBND).

EMLC is paying a 30-day SEC yield of 5.76%, for instance. The ETF is down about 9% year to date after the pullback in May and June when U.S. interest rates jumped.

“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,” said Ramin Toloui, PIMCO’s global co-head of emerging markets portfolio management, in a commentary posted on the firms’ website. “In addition, ongoing reallocations by global investors from developed countries into emerging markets bonds remain a prospective source of support for asset prices.”

Investors should consider using the valuations in EM bonds after the sell-off as an attractive entry point to “build positions toward a long-term strategic target, emphasizing strategies with a higher-quality bias,” he added. [Emerging Market Bond ETFs Slide on Rate Jitters]

“From a fundamental point of view, we see value in the higher yields available on many EM bonds, both in local currency and U.S. dollars,” Toloui wrote. “In a global environment characterized by continued concerns about growth – even amid firmer economic indicators – policy interest rates in both developed and emerging countries are poised to stay low.”

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