Investors are on the hunt for income, which has led many to the WisdomTree Emerging Markets Local Debt (NYSEARCA:ELD) exchange traded fund. Emerging countries are touting the highest growth rates and in turn, are supporting a middle class that cultivates domestic economic growth.
"In the past few years, emerging-markets equities and bonds have become a larger portion of investors' portfolios. In the past year, the emerging-markets debt category has grown by $24 billion which is a 36% increase in assets in the category. This demand is because of stronger economic growth in emerging markets compared with meager growth from the developed world," Timothy Stratus for Morningstar wrote in a recent article.
ELD is an ETF that allows investors returns consisting of income and capital appreciation. The fund invests in local debt denominated in the local currencies of various emerging markets, according to WisdomTree. Countries represented include Brazil, Chile, Columbia, Mexico, Poland, South Africa and South Korea to name a few. Currently, ELD yields 5.2%.
Foreign fixed income is a fairly new asset class that is catching investors attention. Emerging markets are looking at higher growth rates and comparatively low debt levels. Over the past 12 years, the trend of emerging economies depending on those that are developed has changed, and the emerging middle classes found in overseas nations are supporting their own growth, reports Strauts.
It is for this reason that sovereign wealth is expected to grow and investment in overseas debt is attracting assets. In turn, emerging economies are able to maintain steady fiscal policies, a higher savings rate and a growing private pension system, which reinforces the wealth.
However, emerging markets do pose more political and economic risk than a developed market. Most emerging countries do not have a strong Democratic following and have been notorious for defaulting on their debt as soon as stress presents itself.
As usual, with a fixed income product, interest rate risk is present. Plus, currency risk is a factor with ELD. Local currency bonds are riskier than U.S. bonds, so more volatility is evident with ELD.
WisdomTree Emerging Markets Local Debt
Tisha Guerrero contributed to this article.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.