Emerging markets bonds and the corresponding exchange traded funds are, with good reason, viewed as more volatile than their domestic fixed income offerings. However, the former offer impressive yields and the potential great scenario.
The latter has been on display over the past year – a period in which the J.P. Morgan EMBI Global Core Index beat the Bloomberg US Aggregate Bond Index by a margin of nearly 3-to-1. That’s helped spreads between debt issued by developing economies and Treasurys compress, but that doesn’t mean opportunity is limited in this corner of the bond market. The opposite is true.
While Treasurys and domestic bonds are in the limelight amid expectations the Federal Reserve will soon cut interest rates, the fact is some emerging markets central banks lowered borrowing costs last year and are expected to continue doing so in 2024, potentially providing support these bonds and the related ETFs.
With the outlook bright for debt issued by developing economies, some of the following ETFs could work in favor of fixed income investors as 2024 unfolds.
BondBloxx JP Morgan USD Emerging Markets 1-10 Year Bond ETF (XEMD)
The BondBloxx JP Morgan USD Emerging Markets 1-10 Year Bond ETF (XEMD) doesn’t get a lot of attention…yet. Perhaps it should. This ETF turns two years old in June and has nearly $192 million in assets under management. More importantly, it’s a cost effective alternative in this space with an annual fee of just 0.29%.
As its name implies, XEMD doesn’t hold any bonds with maturities of more than 10 years, but just over 29% of the fund’s 308 holdings have maturities of seven to 10 years. Bonds issued by more than countries are represented in the fund and robust fundamentals could lift this ETF in 2024.
“Meanwhile, technicals have emerged as a growing tailwind for the emerging-market debt sector,” according to AllianceBernstein. "Issuance has been well below historical averages for two years running, and corporate net issuance has trended into negative territory. At the same time, the sector has seen major outflows, with 2022 and 2023 suffering the two largest annual outflows on record."
VanEck Emerging Markets High-Yield Bond ETF (HYEM)
The VanEck Emerging Markets High-Yield Bond ETF (HYEM), which follows the ICE BofA Diversified High Yield US Emerging Markets Corporate Plus Index, provides exposure to dollar-denominated junk-rated corporates courtesy of emerging markets companies.
That might seem like an exotic asset class to many bond investors, by HYEM compensates market participants for that risk with a 30-day SEC yield of 7.96%. Plus, the VanEck ETF has been less volatile on an annualized basis over the past three years than the largest US-focused junk bond ETF. There are other perks associated with HYEM.
“With resilient fundamentals and net issuance that is expected to remain muted next year, we see continued support for spreads which may help balance against macro uncertainty,” notes VanEck. “Notably, although most U.S. investment grade bond indexes include emerging markets borrowers, U.S. high yield bond indexes and associated products do not, and so EM high yield bond allocations can add significant diversifications at the borrower level.”
Vanguard Emerging Markets Government Bond ETF (VWOB)
The Vanguard Emerging Markets Government Bond ETF (VWOB), which tracks the Bloomberg USD Emerging Markets Government RIC Capped Index, is one of the oldest, largest and most cost-effective emerging markets bond ETFs.
With an annual fee of just 0.20%, VWOB provides access to more than 700 dollar-denominated sovereign bonds – more than 54% of which are rated AA, A or BBB.
The $3.9 billion VWOB has an average duration of 7.2 years, putting in the intermediate-term sleeve of the duration spectrum. Bonds issued by Saudi Arabia, Mexico and Turkey combine for about 28% of VWOB’s portfolio.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Todd Shriber
Todd Shriber got his start in financial markets as a reporter with Bloomberg News. Later, he became a trader at a Southern California-based long/short hedge fund where he specialized in trading sector and international ETFs leading up to and during the financial crisis. He would later become the web editor at ETF Trends. Currently, he analyzes, researches and writes on ETFs for a variety of Web-based publications and financial services firms.Shriber has been quoted in the Barron's, CNBC.com and the Wall Street Journal. His work has been published on Web sites such as Benzinga, ETF Daily News, ETF Trends, MarketWatch, Fox Business and Nasdaq.com.
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