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Yields, Strong Dollar Propel Emerging Market Bond ETFs

tlydon@globaltrend.com (Tom Lydon)

ETFs indexed to dollar-denominated debt in emerging market countries have risen to lifetime highs on favorable currency winds and investors chasing yield.

The iShares JP Morgan USD Emerging Markets Bond Fund (EMB) and PowerShares Emerging Markets Sovereign Debt Portfolio (PCY) have delivered total returns of more than 10% so far this year.

Because the ETFs invest in U.S. dollar-denominated bonds, a stronger greenback has helped them outperform rivals that don’t hedge their foreign-currency exposure. [Why These Emerging Market Bond ETFs are Outperforming]

Both funds are currently yielding more than 4%.

“This fund provides low-cost exposure to a basket of emerging-markets government bonds. Low debt levels in the emerging world make defaults less likely,” investment researcher Morningstar says in a report on PCY. “Increased investor demand has lowered yields. The fund’s average credit rating is below investment grade, and the sector has had multiple defaults in the past 20 years.” [Emerging Market Bond ETFs to Consider]

EMB has been one of the top-selling ETFs the past month, hauling in $665.6 million, according to XTF.com.

iShares JP Morgan USD Emerging Markets Bond Fund

Full disclosure: Tom Lydon’s clients own EMB.