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By Steven Orlowski

Fixed income investments are frequently less appealing to traders, since by their nature most fixed income is perceived as less risky, volatile - and profitable - than equity investments. Two new emerging market fixed income ETFs may change minds.

Everyone seems to find Brazil attractive for some reason

Investors lean toward a more "buy and hold" approach, selecting investments which complement each other in an attempt to attain a certain level of diversification. Asset allocation is, therefore, typically more appropriate for investors than traders, but there are certainly fixed income ETFs that can provide traders with profit making opportunities as well.

In the emerging market ETF world, investors and traders have much to choose from. Two popular fixed income ETFs are the iShares JP Morgan USD Emerging Market Bond ETF (NYSEARCA:EMB) and the PowerShares Emerging Markets Sovereign Debt Portfolio ETF (NYSEARCA:PCY) - which hold emerging markets bonds issued in U.S. dollars.

EMB "seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the J.P. Morgan EMBI Global Core Index." The index "was formed in the early 1990s after the issuance of the first Brady bond and has become the most widely published and referenced index of its kind" according to the EMB fact sheet.

Reflected in the fund's allocation is a quality amount of country diversification without a heavy bias toward the BRIC countries. Brazil and Russia are ranked 1 and 3 as seen in the breakdown below, but China and India are not even in the top 10. I like seeing a preponderance of frontier markets represented. It makes me feel that the index and fund managers are putting more than a little thought in it.

  • Brazil 7.56%
  • Mexico 7.29%
  • Russia 7.12%
  • Turkey 6.98%
  • Philippines 6.94%
  • Indonesia 6.63%
  • Colombia 5.06%
  • Venezuela 4.79%
  • Peru 4.23%
  • Poland 4.16%
  • Other 39.24%

EMB is up nearly 10% year to date and has experienced some volatility, as evidenced on the chart below. Factor in a 30-day yield of 4.3% and EMB is one of those fixed income ETFs that provides a very compelling investing and trading proposition.

Click to enlarge

The PowerShares Emerging Markets Sovereign Debt Portfolio ETF is in the same space as EMB. It's based on the DB Emerging Market USD Liquid Balanced Index and also sports a well diversified country allocation, with Brazil also the number one holding, although to a less severe percentage than EMB: 4.99% versus 7.56%. The other BRIC countries don't make the top ten. The obvious need here is to be very aware of any ETF's allocation. Blindly buying these two fixed income ETFs may unintentionally over-concentrate your emerging market fixed income portfolio in Brazil.

  • Brazil 4.99%
  • Colombia 4.60%
  • Peru 4.57%
  • Uruguay 4.56%
  • Lithuania 4.48%
  • El Salvador 4.41%
  • Turkey 4.40%
  • Mexico 4.40%
  • Poland 4.40%
  • Qatar 4.40%

Click to enlarge

PCY is also tradable as the chart above illustrates. However, if the volatility or profit potential is not enough for you there are certainly plenty of other options, including leveraged and inverse emerging market ETFs. These are good for hedging against long positions during volatile times and also fun for experienced traders who want to be flat out short or look to double their profits if they are right. I'll get into these beasts in another article. But keep fixed income ETFs in mind for diversification as well as a different vehicle for profitable trading.

Source: 2 Emerging Market Fixed Income ETFs You Should Take A Look At