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Yield Hungry Investors Gobble Up EM Bond ETFs

Zacks Equity Research

Low yields on government bonds in developed markets are shifting investments to emerging market bonds, which are considered as riskier propositions. As government bonds across the globe of nearly $12 trillion are witnessing negative yields, emerging market bonds are offering somewhat better yields and thus attracting investors. Against this backdrop, investing in emerging market bond ETFs may prove to be a profitable investment option.

Investors Investing in EM Bonds

A Bank of America Merrill Lynch’s report showed that investors poured in around $4.92 billion of assets in emerging market bonds for the week ending Jul 20, setting a fresh all-time high. This was preceded by an inflow of $2.69 billion witnessed a week earlier. In a separate report released by JPMorgan Chase & Co. JPM, funds focusing on acquiring emerging market debt securities registered a record inflow of $4.7 billion last week, witnessing the highest inflows since 2004.

Separately, the recently released Lipper report also showed that investors are veering toward emerging market bonds. According to Lipper, the U.S. based funds that maintain a portfolio comprising emerging market bonds saw inflows of $918 million last week, the highest level since 1992. Growing demand for emerging markets bonds led the largest emerging market bonds ETF, iShares JPMorgan USD Emerging Markets Bond EMB to gain nearly 3.5% over the past one month.

What Boosting EM Bonds’ Demand?

A drastic decline in yields on developed market government bonds following Brexit played a major role in shifting investor attention toward emerging market bonds. After June’s Brexit referendum, financial markets took a major hit and investors shifted their assets to the comparatively less risky developed market government bonds, which led yields on the same to decline significantly (read: Brexit Fuels a Global Rally in Bond ETFs).

Yield-loving investors are looking for securities that are in a favorable position in terms of yields. So, they are investing in emerging market bonds, which are less ruffled by Brexit. Trade relations between the U.K. and the broad-based emerging market are meager, thus posing no-to-little threat to emerging market investing (read: Play These Emerging Market Bond ETFs to Lessen Brexit Woes).

Moreover, large exposure to commodities also helped emerging markets to surge recently on the back of rising commodity prices. A staggering performance was delivered in the first half by Latin America and Russia. While Russia benefitted from an oil price rally, Latin America won on stronger commodities and hopes of a political change for the better (read: EM ETFs Had a Seven-Year Best 1H: Will the Surge Last?).

Additionally, emerging markets are also expected to witness a favorable growth scenario despite several concerns. Morgan Stanley MS expects developed markets to log only 1.2% growth next year, whereas emerging markets are expected to grow from 4% this year to 4.7% in 2017. 

3 ETFs in Focus

Though risky, emerging market bond ETFs are poised to provide encouraging returns in at least the near term. Hence, we have highlighted three emerging market bonds ETFs that will remain on investors’ radar in the coming days (see all Emerging Market Bond ETFs here).

PowerShares Emerging Markets Sovereign Debt ETFPCY 

This fund follows the DB Emerging Market USD Liquid Balanced Index and holds 85 emerging market debt securities in its basket. Brazil takes the top spot in terms of allocation with 3.82% of its assets invested in securities from the country followed by Colombia (3.80%), El Salvador (3.70%) and Indonesia (3.6%). PCY is quite popular in its space with AUM of nearly $3.5 billion and solid volume of 1 million shares per day. This product has an expense ratio of 0.50%, slightly lower than the category average of 0.52%. It gained 3.5% over the past one-month period and has an annual dividend yield of 5.02%.

Vanguard Emerging Markets Government Bond ETF VWOB

This fund seeks to track the performance of the Barclays USD Emerging Markets Government RIC Capped Index. It has a basket of 899 bonds with 78.1% of its assets invested in emerging market securities. The fund has an average duration of 6.5 years and average effective maturity of 10 years. VWOB has AUM of nearly $524.7 million and trades in impressive volume of more than 74,000 shares per day on average. It charges a higher 34 bps in annual fees, significantly lower than the category average. It gained 2.4% over the past one-month period and has an annual dividend yield of 4.52%.

iShares Emerging Markets Local Currency Bond LEMB

This ETF provides targeted exposure to debt securities issued in emerging markets by tracking the Barclays Emerging Markets Broad Local Currency Bond Index. It holds 210 debt securities in its basket and has an effective duration of 6.81 years. South Korea takes the top spot in terms of allocation with 20.75% of its assets invested in securities from the country followed by Brazil (13.28%). The fund has amassed $482.9 million in its asset base. It trades in a moderate volume of more than 172,000 shares a day on average. LEMB charges 50 bps in annual fees. It gained 0.70% over the past one-month period.

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JPMORGAN CHASE (JPM): Free Stock Analysis Report
 
MORGAN STANLEY (MS): Free Stock Analysis Report
 
ISHARS-EM LCBF (LEMB): ETF Research Reports
 
ISHARS-JPM EM B (EMB): ETF Research Reports
 
PWRSH-EM SVN DP (PCY): ETF Research Reports
 
VANGD-EM GOV BD (VWOB): ETF Research Reports
 
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