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Emerging Bond ETFs as a Potential Value Play

editor@etftrends.com (ETF Trends)

In the ongoing search for yield, exchange traded fund investors may consider diversifying with emerging market bonds to generate more attractive payouts.

Supporting the global fixed-income market, central banks have implemented zero and even negative interest rate policies, along with other accommodative measures, that have pushed yields over $10 trillion in global debt into the negative. Consequently, William Sokol, ETF Product Manager at VanEck, suggests investors may want to look at emerging market debt as a potential value play in the fixed-income market.

“Looking at the spread per credit rating provided by issuers in the emerging markets compared to high-yield in the U.S, I think the emerging market value story plays out,” Sokol said in a phone interview with ETF Trends.

Related: Direxion’s New Bearish Junk Bond ETF to Hedge Market Risks

Moreover, some argue that the emerging market debt outlook looks more favorable as commodity prices, notably oil, seem to have stabilized and economic activity in some key developing countries begin to rebound.

“This cyclical recovery should start helping to slow the pace of deteriorating debt dynamics and credit quality in some of these key countries,” Claudia Calich, manager of the M&G Emerging Markets Bond Fund, wrote for Morningstar. “The question is not if the asset class is improving in quality, which it is not, but are you getting paid for owning it if the pace of deteriorating is slowing? The answer is yes, particularly in light of the search for yield given low or negative yields in a large part of the global bond markets.”

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Emerging market bond ETFs are beginning to have their moment in the sun. For instance, the broad VanEck Vectors Emerging Markets Aggregate Bond ETF (EMAG) , which includes a combination of U.S. dollar-, euro- and local currency-denominated bonds, has gained 7.5% year-to-date. EMAG also comes with an attractive 4.45% 30-day SEC yield.

The VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (EMLC) , which tracks emerging market bonds denominated in the local currencies or in the currency of the issuing country, rose 10.1% year-to-date. EMCL has a 5.72% 30-day SEC yield.

Additionally, the VanEck Vectors Emerging Markets High Yield Bond ETF (HYEM) , which targets USD-denominated speculative-grade emerging-market bonds, increased 8.9% so far this year. HYEM has a 7.34% 30-day SEC yield.

Related: Treasury Bond ETFs – Best Start to Year Since 2003

“Over the long term, an allocation to EM bonds can potentially provide both yield enhancement and diversification benefits within a broader portfolio,” Sokol said in a note. “EM bond yields have risen since early 2013, reflecting the market’s assessment of creditworthiness, and may offer a yield premium versus developed bond market yields. Low correlation with other asset classes, including core fixed income sectors, may improve a portfolio’s diversification.”

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.