Emerging market bond exchange traded funds are presenting opportunity due to the low debt load most related economies have. They are selling at good discount rates, presenting opportunity for the coming years.
“In the current low interest-rate environment, many investors are searching for opportunities to diversify their bond portfolios and earn extra income given the paltry yields offered by U.S. Treasuries. As a result, emerging-markets bonds have seen impressive asset flows and have become a larger portion of investors’ portfolios in the past few years,” John Gabriel wrote for Morningstar.
ETFs such as the iShares Emerging Markets USD Bond ETF (EMB) or the PowerShares Emerging Markets Sovereign Debt Portfolio (PCY) have suffered slight losses of 1.5% each in 2013, but have made incremental comebacks over the past month. PCY is up 1.1% over a one-month time period, while EMB is up 0.7% over the past month. Both ETFs are yielding about 4%. [Emerging Market Bond ETFs for Yield]
There are several other ETFs in the category and Invesco PoweShares recently filed to launch an emerging market local debt fund. [PowerShares Readies ETF]
Both EMB and PCY are denominated in U.S. dollars which eliminates the guesswork of currency conversion and plays on the current strength the greenback is showing. Although the ETFs track overseas sovereign debt, the strength of the U.S.economy and dollar have put a damper on any overseas gains, reports Eric Dutram for Zacks. [iShares: The Great Duration Rotation Continues - But for How Long?]
The outlook for emerging economies remains positive and sentiment is optimistic as these markets remain on a steady growth trend. Long term trends are also looking good for many emerging economies as low debt loads and reasonable discount rates remain characteristic.
Many emerging markets are classified as “below investment grade” although the respective economy remains strong, which means the yields are much higher than those of developed economies. PCY has a yield of 3.7%, while EMB has a payout of 3.6%. [Rising Interest in Riskier Emerging Market ETFs]
PowerShares Emerging Markets Sovereign Debt Portfolio
Tisha Guerrero contributed to this article.
Full disclosure: Tom Lydon’s clients own EMB.