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Bond ETF Investors Should Look to Emerging Markets

etftrends@etftrends.com (ETF Trends)

As more take a second look at the developing world, fixed-income investors can also tap the emerging markets through local currency debt-related exchange traded funds.

BlackRock Inc. believes that central bank cuts across the emerging markets will extended the largest surge in debt in at least 13 years, Bloomberg reports.

“We are in a sweet spot for emerging-market assets,” Richard Turnill, global chief investment strategist at BlackRock, said in a research note. “We generally favor emerging-market local-currency debt over U.S. dollar debt. EM central bank rate cuts amid lower inflation should support many local rates markets.”

The London-based Schroders Plc also suggests investors should buy emerging market local bonds, projecting the asset class will be the best performer this year.

“Local-currency will probably be the best-performing asset class this year,” James Barrineau, a money manager at Schroder Investment Management, told Bloomberg. “We’re in an environment where sentiment lifts all boats and it’s just a question of to what degree one outperforms the other.”

Moreover, emerging market local debt offer attractive yields. According to J.P. Morgan Chase & Co., local emerging market bonds yield an average 6.37%, or 63 basis points more than developing-nation U.S. dollar-denominated bonds.

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Looking ahead, economists anticipate central banks from Turkey to Russia will cut borrowing costs as exchange rates stabilize, especially with the U.S. dollar weakening, which helped alleviate inflationary pressures.

Investors can also gain broad exposure to yield-generating emerging market local currency bonds through ETF offerings. For instance, the iShares Emerging Markets Local Currency Bond ETF (LEMB) has a 4.26% 30-day SEC yield. Top country weights include South Korea 19.1%, Brazil 12.1%, Mexico 8.6%, Colombi 4.6% and Indonesia 4.6%.

The Market Vectors Emerging Markets Local Currency Bond ETF (EMLC) has a 5.67% 30-day SEC yield. Its top country exposure include Brazil 9.2%, Poland 9.2%, Mexico 8.7%, Malaysia 8.6% and Indonesia 7.4%.

The actively managed WisdomTree Emerging Markets Local Debt Fund (ELD) has a 5.78% 30-day SEC yield. The fund’s largest weights include Brazil 11.6%, Mexico 9.9%, Poland 9.8%, Russia 7.2% and Colombia 7.2%.

The SPDR Barclays Emerging Markets Local Bond ETF (EBND) has a 4.69% 30-day SEC yield. The top country components include South Korea 12.3%, Brazil 10.7%, Mexico 10.0%, Malaysia 8.4% and Thailand 7.3%.