As part of a diversified exchange traded fund portfolio, investors are including emerging market assets into the mix. Most are familiar with equity options, like those that track the MSCI Emerging Markets Index, but investors may also consider emerging market bond ETFs with enticing yields, as well.
With most of the developed world weighed by heavy debt burdens, the emerging markets standout as an island of fiscal soundness, writes Jose Garcia-Zarate, senior ETF analyst, for Morningstar.
Emerging market debt boasts relatively strong credit quality, given their low debt-to-GDP ratios, and they offer attractive yields, compared to the safer alternatives - currently, 10-year Treasury notes yield a paltry 1.65%.
Moreover, emerging market bonds have exhibited a low correlation with traditional fixed-income assets, which helps boost a portfolio's diversification qualities.
ETF providers originally offered exposure to emerging market debt through U.S. dollar-denominated funds - they would not expose investors to currency risks, but the ETFs would not benefit in case the emerging market currency strengthens against the dollar.
- iShares JPMorgan USD Emerging Markets Bond Fund (NYSEARCA:EMB) has a 0.60% expense ratio and a 3.80% 30-day SEC yield.
- PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEARCA:PCY) has a 0.50% expense ratio and a 4.59% 30-day SEC yield.
On the other hand, investors may now look through emerging market bond ETFs that are issued in their local currencies. Those who consider these funds are looking for high yields and potential currency gains.
"In our view, currency issues pose the main risk to investors," Garcia-Zarate said. "For all the talk of development of internal sources of growth, emerging markets remain fundamentally geared towards exports. This requires competitive exchange rates. Investors in these products need to be aware that emerging governments are not averse to implementing ad-hoc policy measures to arrest/reverse local currency appreciation."
- WisdomTree Emerging Markets Local Debt Fund (NYSEARCA:ELD) has a 0.55% expense ratio and a 3.99% 30-day SEC yield.
- Market Vectors Emerging Markets Local Currency Bond ETF (NYSEARCA:EMLC) has a 0.49% expense ratio and a 5.14% 30-day SEC yield.
- SPDR Barclays Capital Emerging Markets Local Bond ETF (NYSEARCA:EBND) has a 0.50% expense ratio and a 4.82% 30-day SEC yield.
- iShares Emerging Markets Local Currency Bond Fund (NYSEARCA:LEMB) has a 0.60% expense ratio and a 4.50% 30-day SEC yield.
"The emerging debt ETF market in Europe has grown significantly, and we at Morningstar expect further growth in the future," Garcia-Zarate added. "We anticipate ETFs will soon be launched offering exposure to just the high-yield segment of the emerging corporate bond market."
- iShares Emerging Markets High Yield Bond (BATS:EMHY) has a 0.65% expense ratio and a 6.13% 30-day SEC yield.
- Market Vectors Emerging Markets High Yield Bond ETF (NYSEARCA:HYEM) has a 0.40% expense ratio and a 7.48% 30-day SEC yield.
Max Chen contributed to this article.
Disclosure: I am long EMB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.