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Opportunity With EM Bond ETFs in 2019

This article was originally published on ETFTrends.com.

Emerging markets debt has not been immune to the downdraft affecting assets in developing economies this year. The iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) , the largest exchange traded fund tracking bonds in developing economies, is lower by more than 11% year-to-date.

EMB tracks the J.P. Morgan EMBI Global Core Index, a market-cap-weighted index. Potential investors should note that since it is a cap-weighted index, countries with greater debt will have a larger position in the portfolio. Some money managers, including Morgan Stanley, see some opportunities with emerging markets debt in the new year.

“The firm is betting on Argentina’s sovereign local and hard-currency bonds and local debt in Brazil and South Africa,” reports Bloomberg. “On the corporate side, it favors bonds from Latin America and Asia over developing nations in Europe, which will be dragged down by Turkey. Brazilian pulp, meat and infrastructure companies are particularly attractive, according to money managers Eric Baurmeister and Warren Mar.”

Looking Ahead

Rising external financing costs and current account deficits are among the factors plaguing emerging markets debt this year. Some analysts and market observers believe the scenarios confounding emerging markets bonds this year could linger into 2019.

While many are still wary of the current international environment, especially with increasing trade disputes, the strength in the U.S. dollar and rising interest rates are a bigger headwind.

“Emerging-market assets sold off this year, pressured by a stronger dollar, higher interest rates globally and trade tensions between China and the U.S., the world’s two biggest economies. Stocks entered a bear market in October when Treasury yields crossed the 3.2 percent level, hard-currency sovereign bonds are headed for their first losses since 2013 and all major developing-nation currencies are set to end the year in negative territory,” according to Bloomberg.

Along with EMB, fixed-income investors can look to options like the Invesco Emerging Markets Sovereign Debt Portfolio (PCY) and JPMorgan USD Emerging Markets Sovereign Bond ETF (JPMB) to gain exposure to dollar-denominated emerging market debt.

For more fixed income investment solutions, visit the Fixed Income Channel.