Good Reasons To Love These Bond ETFs
U.S. interest rates reside near historic lows. That situation is worse in many other parts of the developed world where trillions of dollars of negative-yielding sovereign debt can be found. All of that and global investors are showing a fondness for emerging markets assets not seen for a several years.
Essentially, it is a perfect storm for emerging markets bonds this year, and developing world currencies are rebounding, lifting exchange-traded funds such as the Market Vectors Emerging Mkts Local ETF (NYSE: EMLC).
Emerging Markets, Debt And Bonds
Bonds found in the $2.1 billion EMCL certainly entice when it comes to yield. The 10-year bond in Brazil yield 11.4 percent at the end of July. The same bond in Turkey sported a yield of 9.5 percent. Even relatively steady Chile offers 4.5 percent on its 10-year sovereigns. Brazil, Turkey and Chile, in that order, combine for 16.8 percent of EMLC's weight. The ETF has a 30-day SEC yield of 5.55 percent.
“Emerging markets debt has attracted investor attention this year, as current low and negative yields in developed markets have led many to look outside of core fixed income asset classes for attractive income. The asset class has benefitted from several tailwinds since the start of the year, including a rebound in commodity prices, a restrained U.S. dollar, and expectations that U.S. interest rates will remain "lower for longer," even if the Federal Reserve decides to hike rates before the end of the year,” said VanEck in a recent note.
Investor Enthusiasm And IGEM
Investors' enthusiasm for emerging markets bonds has helped at least one new ETF with exposure to the asset class: The VanEck Vectors ETF Trust Market Vectors EM Investment Grade + BB Rated USD Sovereign Bond ETF (NYSE: IGEM).
IGEM, which is less than two months old, follows the “J.P. Morgan Custom EM Investment Grade Plus BB-Rated Sovereign USD Bond Index (JPEGIGBB), which is comprised primarily of investment grade U.S. dollar-denominated bonds issued by emerging markets (EM) governments,” according to VanEck. The ETF is already home to more than $15 million in assets under management.
“In addition to supportive technical and monetary policy, fundamentals appear to be stabilizing, and in many cases, improving in emerging markets economies. With economic growth expected to rise, the International Monetary Fund (IMF) is forecasting that the growth differential between developed markets and emerging markets will increase in coming years. Debt-to-GDP ratios remain well below those of developed markets. Policy reforms such as those in India, Malaysia, and Indonesia are likely to be positive for investors, and support the case for focusing on higher quality sovereign bonds,” added VanEck.
IGEM has a 30-day SEC yield of nearly 3.1 percent.
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