Seeking Yield with Emerging Market Bond ETFs

A guide to investing in emerging market debt; a market offering yields that are much higher compared to “safe” alternatives

Jose Garcia Zarate 18 July, 2012 | 4:49PM

Emerging market exposure is now part of most investment portfolios, with investors lured by comparatively high returns and an increasing perception of diminishing risk. Initially the bulk of emerging market exposure was sought in equity markets, but increasingly, investors have been seeking the benefits of emerging market bonds, which are underpinned by a compelling macroeconomic rationale. Emerging market economies have become key engines of global growth and are weathering the crisis in much better shape than their developed counterparts. More crucially, in a world where investors are worried about excessive leverage, emerging market economies stand out as an example of fiscal soundness. As a result, emerging market debt credit quality has steadily increased; and while their bond yields have fallen, they still remain enticingly above those offered by “safe” alternatives in developed nations. In addition, historically emerging market debt has shown a low correlation with traditional fixed income investments, which helps investors diversify risk in their portfolios.

Exchange traded fund (ETF) providers have been keen to capitalise on this growing investment trend by increasing their offerings, both in terms of number of funds and exposures to the varied segments of the emerging debt market. As I write this, total assets under management in 10 European-domiciled emerging market debt ETFs surpass EUR 2.5 billion. These ETFs cover government and corporate emerging bond markets, which are denominated in USD and local currencies.

Below is an overview of each of the different ETF types.   

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Jose Garcia Zarate

Jose Garcia Zarate  is Associate Director of Passive Strategies Research for Morningstar Europe

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