U.S. markets closed

Higher Yielding Emerging Market Bond ETFs Are Outperforming


Developing market equities may have fallen off this year. However, emerging market bonds and related exchange traded funds are outperforming U.S. debt, and they come with more attractive yields.

Year-to-date, the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) , which has a 7.25 year duration and a 5.04% 30-day SEC yield, rose 1.6%; PowerShares Emerging Markets Sovereign Debt Portfolio (PCY) , which has a 8.31 year durationa nd a 6.25% 30-day SEC yield, gained 1.6%; and Vanguard Emerging Markets Government Bond ETF (VWOB) , which has a 6.5 year duration and a 4.63% 30-day SEC yield, returned 2.8%. These bond ETFs track emerging market sovereign and agency debt securities denominated in the U.S. dollar, which helps diminish currency risks. [Investors Turn to Emerging Market Bond ETFs for Higher Yields]

In contrast, the iShares 7-10 Year Treasury Bond ETF (IEF) , which has a duration of 7.65 years and a 2.06% 30-day SEC yield, is up 1.7% so far this year.

Additionally, U.S. dollar-denominated emerging market bond ETFs have also produced some attractive yield opportunities. For instance, the actively managed WisdomTree Emerging Markets Corporate Bond Fund (EMCB) has a 5.11 year duration and a 5.22% 30-day SEC yield. The SPDR BofA Merrill Lynch Emerging Markets Corporate Bond ETF (EMCD) comes with a 5.75 year duration and a 4.75% 30-day SEC yield. The iShares Emerging Markets Corporate Bond ETF (CEMB) has a 5.29 year duration and a 4.83% 30-day SEC yield. The emerging market corporate bond ETFs mostly include USD-denominated investment-grade quality debt, with about a 20% tilt toward speculative-grade securities. Year-to-date, EMCB was up 0.9%, EMCD was 1.8% higher and CEMB advanced 3.0%.

Meanwhile, the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) , which has a 8.13 year duration and a 3.54% 30-day SEC yield, dipped 0.7% so far this year.

Dollar-denominated bonds sold by developing country companies were among the best performers among 10 major global assets with a 3.5% return this year, reports Ya Xie for Bloomberg.

Corporate emerging market bonds outperformed developed market stocks, the S&P 500, U.S. high yield corporate debt, EM-dollar-denominated sovereign bonds, U.S. Treasuries, developed market government bonds, emerging market stocks, EM local-currency government bonds and gold, according to Bloomberg and JPMorgan data.

While many emerging markets have garnered a bad reputation for experiencing spiraling debt defaults in face of rapid currency depreciation, the developing economies are more resilient in a weak commodities environment.

According to BlackRock, emerging market governments have accumulated less dollar debt, built up foreign reserves and adopted flexible exchange rates to obviate mistakes during the 1980s and 1990s crises.

“When compared with the late 1990s, sovereign balance sheets have become less vulnerable to a stronger U.S. dollar,” Sergio Trigo Paz, head of emerging markets fixed income at BlackRock, said in a note. “High yield emerging-market corporate bonds could be a good source of income for global investors.”

Additionally, BlackRock argues that emerging market corporate debt is attractive relative to the near-zero yields on developed European debt. According to JPMorgan, EM bonds yield about 3.5 percentage points more than U.S. Treasuries.

While some, like the Bank For international Settlements, warned that USD-denominated emerging market debt may be vulnerable to a strong dollar, Goldman Sachs Asset Management argues that the concerns are exaggerated. Companies that borrowed foreign debt typically also hedge currency exposure or have a steady dollar revenue stream to payoff the interest.

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

Max Chen contributed to this article.

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.