Emerging market bond exchange traded funds are quickly growing in popularity in a low-rate environment as yield-starved investors turn to alternative venues in search of a little extra income.
According to BlackRock data, emerging market bond ETFs attracted some $5.8 billion in net inflows over the third quarter, the largest money influx of any quarter on record, reports Thomas Hale for the Financial Times.
The record inflows follow the previous quarterly record in the second quarter of this year. Year-to-date, emerging market bond ETFs have seen $12.7 billion in inflows, which already outpace the previous annual record of $8.3 billion in 2012.
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The ongoing inflows reflect the continued attractiveness of the emerging bond market as many investors look to the prospect of higher yields, strengthening currencies and relatively cheaper valuations to developed market debt.
Furthermore, the emerging debt market is being supported by global fixed-income investors as aggressive monetary policies out of the European Central Bank and Bank of Japan have caused yields on trillions in global Treasuries to fall into the negative.
“Investors will continue to be challenged by persistently low global bond yields. We expect flows into low cost products like ETFs to continue as investors seek to cut fees to preserve income,” Stephen Cohen, head of Fixed Income Beta at BlackRock, wrote in a note.
Investors interested in emerging market bond exposure have a number of ETF options available. For instance, the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) is the largest emerging bond ETF available. EMB has a 7.19 year duration and a 4.47% 30-day SEC yield.
EMB tracks U.S. dollar-denominated emerging market debt securities, so the ETF is less exposed to currency risks or the negative effects of depreciating emerging currencies. Additionally, other popular USD-denominated emerging bond ETFs include the PowerShares Emerging Markets Sovereign Debt Portfolio (PCY) , which has a 8.95 year duration and a 4.73% 30-day SEC yield, and the Vanguard Emerging Markets Government Bond ETF (VWOB) , which has a 6.6 year duration and a 4.14% 30-day SEC yield.
SEE MORE: A Solid Emerging Market Bond ETF Pick
Alternatively, the VanEck Vectors Emerging Markets Local Currency Bond ETF (EMLC) , which has a 5.01 year duration and a 5.31% 30-day SEC yield, tracks local currency-denominated bonds, so the fund is exposed to fluctuations in the foreign currencies. However, strengthening emerging currencies, or a weakening U.S. dollar, would further bolster returns.
Additionally, while the emerging markets may be associated with greater risks, the funds’ portfolio includes quality debt. For instance, EMB includes investment-grade debt AA 2.2%, A 11.5% and BBB 41%, along with speculative-grade BB 20.3%, B 19% and CCC 5.5%.
For more information on the fixed-income market, visit our bond ETFs category.