Investor interest in the emerging markets is growing, and one way to include this theme in an investment portfolio is through an emerging markets bond exchange traded fund.
Investing in foreign countries is a way to diversify, remarks Ben McClure for Investopedia. But potential investors need to understand the risks involved, which include exchange rate risks, political or economic instability, and differences in reporting and tax regulations.
Emerging markets are relying on domestically issued local currency debt and this means that their debts are more stable and reliable than in the past, write Carmen M. Reinhart and Kenneth Rogoff for The Wall Street Journal. Government-issued debt is known as “sovereign debt.”
Governments usually don’t differentiate between holders of different types of debt. But most countries default on external debt a bit less frequently than on domestic debt. During times of economic turmoil, shares of total countries in the world in default have exceeded 40% in the mid-19th and 20th centuries.
One way to capitalize on emerging market sovereign debt is through the ETF PowerShares Emerging Mkts Sovereign Debt (PCY). PCY tries to reflect the price and yield of the DB Emerging Market USD Liquid Balanced Index, as stated in InvescoPowerShares. The Index tracks returns of liquid emerging market U.S. dollar-denominated government bonds issued by emerging market countries.
Countries represented in the fund include Ukraine, Indonesia, Venezuela, Russia, Turkey, Vietnam and Qatar.
- PowerShares Emerging Mkts Sovereign Debt (PCY): up 20.3% year-to-date; 23 holdings; expense ratio of 0.5%
Max Chen contributed to this article.