Market Overview

Koesterich Highlights EM Bond Opportunities (EMB, LEMB, PCY)


In a note published on Monday April, Russ Koesterich, iShares Global Chief Investment Strategist, reiterated his view that income investors should consider emerging markets bonds for their fixed income portfolios. Last week, Koesterich said yield-starved investors are faced with a catch-22: "Accept lower income or take on additional risk to generate incremental yield."

Previously, Koesterich has highlighted the increased stability and improving fundamentals in emerging markets, but in Monday's note, he bolstered the argument for emerging markets bond ETFs saying "emerging markets exited the financial crisis in a far better position than their developed market counterparts. The average debt burden of emerging markets is less than 40% of gross domestic product, while developed market debt has soared to more than 100% of GDP on average."

As just one example, Turkey has a debt/GDP ratio of just 40%. That compares to just over 100% for the U.S.

In Monday's note, Koesterich continues to favor the iShares J.P. Morgan USD Emerging Markets Bond Fund (NYSE: EMB). EMB has almost $4.6 billion in AUM, fees of 0.6%, 124 holdings and a current distribution yield of 4.72%. EMB's top-five country weights are Brazil, Russia, Mexico, Turkey and the Philippines.

Citing India as the exception, Koesterich said emerging markets inflation risk is fading. He added that is a trend the International Monetary Fund expects to continue this year. And there is the obvious advantage emerging markets bonds have over U.S. Treasuries.

"Despite emerging markets' improving fundamentals, emerging market bonds are offering a significant, and historically high, premium over most developed market debt. Currently, emerging market bonds are yielding roughly 350 basis points over the 10-year Treasury, close to a record high," Koesterich said.

Another iShares option to consider is the iShares Emerging Markets Local Currency Bond Fund (NYSE: LEMB). LEMB debuted in October 2011 and now has $30.6 million in AUM and also charges 0.6%. The fund's top-five country weights are South Korea, Brazil, Mexico, Russia and Israel.

EMB and LEMB both worthy rivals investors might want to consider as well. The PowerShares Emerging Markets Sovereign Debt ETF (NYSE: PCY), EMB's most direct rival, yields over 5%. The Emerging Markets Local Currency Bond ETF (NYSE: EMLC) was one of the original local currency EM bond ETFs and today has over $741.1 million in AUM.

Products with more regional focus include the WisdomTree Asia Local Debt ETF (NYSE: ALD) and the Market Vectors LatAm Aggregate Bond ETF (NYSE: BONO).

For more on bond ETFs, please click HERE.


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