What’s In Your Emerging Market Bond ETF?
As the U.S. market slowly wanders towards the road to recovery, many investors who had avoided the short-term effects of the recession are now left looking for a long-term solution for slow American economic growth without risking everything. One option is to look through emerging market bonds, which often offer growth potential unparalleled in the United States without the risk of emerging equities.
Investors can choose from a wide variety of emerging market bond ETFs, including corporate and government bond exposure and, for more targeted exposure, country-specific ETFs in the emerging market space [see Free ETF Country Exposure Tool].
While targeted emerging country bond ETFs can be a great holding for investors who are well versed in the political and economic landscape of the country, those looking to break into the fourteen existing emerging market bonds should take time to make sure their “broad exposure” ETF is really that.
Cast A Broad Net
Emerging market ETFs are a great tool for any investor who is tired of the slow returns trickling from the U.S. and European markets, but not every broad ETF provides what they promise. ETFs with single region or country exposure are left open for huge volatility from political changes, adjusting international monetary policies, and the U.S. dollars price in foreign markets. Many of these emerging bond ETFs have a slight, if not heavy, tilt towards the more popular and large emerging economies: Brazil, Russia, India and China. While all of these countries have performed well in the past, they do not offer the highly diversified returns a broad investor is searching for, and some on Wall Street have even abandoned these BRIC markets because of over saturation [see 10 Questions About ETFs You've Been Too Afraid To Ask].
The chart below highlights five emerging bond ETFs that boast a broad-market exposure, revealing that not all of these funds have such a wide variety in their holdings, but instead many feature a strong tilt to more developed BRIC economies:
Emerging Markets Corporate Bond Fund (CEMB, C+)
SPDR Barclays Capital Emerging Markets Local Bond ETF (EBND, A-)
JP Morgan Emerging Markets Bond Fund (EMB, A)
Market Vectors Emerging Markets Local Currency Bond ETF (EMLC, A-)
Emerging Markets Sovereign Debt Portfolio (PCY, A+)
Even though PCY features the fewest holdings and number of countries in its fund, this equal weight fund also only dedicates 8.39% of its holdings to Brazil and Russia, while funds like CEMB and EMB reserve much more space for these powerhouse economies. The comparison above is only based on the holdings of these five emerging market ETFs; investors should also take a close look under the hood of the various expense ratios, past returns and investment methodologies of all fourteen emerging market bond ETFs, as these differences often have a material impact on bottom line returns.
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Disclosure: No positions at time of writing.
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