Risk-On Environment Helps Fuel EM Bond ETFs

ETF Trends

Exchange traded funds holding emerging markets bonds could continue to outpace other fixed-income assets as global central banks employ cheap money policies, with the European Central Bank recently jumping on the bandwagon, and push investors to riskier assets.

“Where do people go?” Lisa Abramowicz asked on Bloomberg TV. “They look around and they see junk bonds are really crowded – yields are at record lows, prices are high, and they say, ‘let’s go into emerging markets.’”

Emerging market debt is being supported by global stimulus measures that are supporting all risk assets. [ETF Chart of the Day: Returning to EM Bonds]

“The technical of this market are almost impossible to fight,” Karissa McDonough, the fixed-income strategist at People’s United Wealth Management, said in a Bloomberg article.

Consequently, investors are turning to emerging market bond funds for higher yields. [Institutional Investors Return to Emerging Markets Bonds]

“Mutual fund investors funneled record amounts of money into emerging market bond funds last week,” Abramowicz added.

The iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) , which tracks U.S. dollar-denominated developing market bonds, has attracted $983.9 million in assets over the past month, according to ETF.com data. EMB has a 4.33% 30-day SEC yield and is up 8.9% year-to-date.

While emerging market debt is considered risky because of the less developed nature of the economies, developing countries also issue investment-grade bonds. EMB’s portfolio credit quality breakdown includes investment-grade AA 2.8%, A 10.1% and BBB 42.2%, along with junk-grade BB 24.2%, B 10.6% and below B 5.0%.

The PowerShares Emerging Markets Sovereign Debt Portfolio (PCY) , another dollar-denominated ETF, credit quality allocation includes AAA 0.8%, AA 5.8%, A 10.1%, BBB 40.8%, BB 32.1%, B 7.4% and below B 2.9%. PCY has a 4.58% 30-day SEC yield and is up 10.9% year-to-date.

Alternatively, the Market Vectors Emerging Markets Local Currency Bond ETF (EMLC) tracks local currency-denominated bonds, so the ETF is subject to currency risks – a depreciating foreign currency means a lower u.s. dollar return. Credit qualities include AAA 4.6%, AA 3.4%, A 24.7%, BBB 15.0%, BB 9.3% and not rated 43.0%. EMCL has a 4.87% 30-day SEC yield and is up 5.4% year-to-date.

Additionally, the WisdomTree Emerging Markets Local Debt Fund (ELD) is an actively managed ETF that also holds local currency-denominated bonds. The fund leans toward investment-grade quality bonds, including AAA 3.1%, AA 11.6%, A 44.7% and BBB 30.1%. ELD has a 5.37% 30-day SEC yield and is up 4.3% year-to-date.

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


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