While most investors have been focused in on the collapse in
the emerging market equity world, there has also been some
extremely rough trading in the bond side of these developing
nations as well. That is because many investors now seem
unwilling to deal with the higher volatility of these securities
in a rate environment that could be moving higher.
Furthermore, thanks to the
of emerging market bonds, even a small move south can create a
bit of a panic, as investors rush to dump assets in this
now-shunned investment type. This has certainly been the case as
of late, as literally billions have been taken out of global and
emerging market bond funds to start the month, helping to push
developing market bond funds to fresh 2013 lows.
Brighter Days Ahead?
While the losses have been pretty bad in the emerging market
bond world, pretty much pacing the performance seen on the equity
side, there is reason to be optimistic going forward. First,
emerging markets countries have by-and-large learned their
lessons from previous crises, and thus have ample reserves and
relatively low budget issues already (also read
The Key to International ETF Investing
More importantly, the anti-yield trade could be in its last
stages-at least for this round-as recent U.S. data suggests that
the Fed will not tighten in the near term. The latest jobs
report was just so-so and unemployment actually ticked higher, so
it will be very difficult to justify a bond tapering with this
kind of macro environment.
Given this, we could see a bounce back in this space in the
near term, suggesting that investors looking to do some bottom
fishing might want to take a closer look at this space. In
particular, we have highlighted three emerging market bond
below which could be in prime position for a turnaround once the
market calms down and cooler heads prevail (also read
Emerging Market ETFs Tumble on Global Worries
That is because all three of these bond ETFs are among the
most 'oversold' when looking at the RSI (14) metric in the entire
ETF world. In fact, all three have a Relative Strength Index
(RSI) reading of less than 15, suggesting they are all due for a
bounce in short order.
iShares JP Morgan USD Emerging Markets Bond Fund (
This fund follows the JPMorgan EMBI Global Core Index, holding
about 200 bonds in its basket. Costs come in at 59 basis points
for this fund, while volume is excellent at around one million
shares a day.
The fund is well diversified by country, with four nations
from around the globe each receiving a little over 6.2%.
Investors should also note that the effective duration isn't too
extreme, coming in at 7.3 years.
In terms of recent performance though, the ETF has slumped by
about 8.4% in the past month, crushed by the recent series of
macro worries. The fund still represents a solid choice from a
yield perspective though, as the product has a 4% 30 Day SEC
iShares Emerging Markets High Yield Bond ETF (
For a focus on junk securities, investors have EMHY at their
disposal, a fund tracking the Morningstar Emerging Markets High
Yield Bond Index. The ETF is a little pricier and less popular
though, with fees coming in at 65 basis points a year, and volume
below the 50,000 share mark per day.
Still, the ETF is well diversified from an individual security
perspective, holding about 200 bonds in its portfolio and
devoting just under 2% to each note. Country exposure is a bit
more concentrated-with big holdings in Venezuela and
Turkey-though the rest is rather well spread out (read
Forget BOND, Focus on these ETFs instead
It is also worth noting that both corporate and sovereign debt
is included, so it can be thought of as a broader play on the
emerging market space. The ETF is also less on the effective
duration front, at just under six years, while the credit rating
is a bit less overall for the securities than some of its
counterparts on this list.
For performance, this ETF has also struggled in this new type
of environment, losing about 8.6% in the past one month alone. It
is a better pick from an income look though, giving investors
about 5.65% in 30 Day SEC Yield terms.
PowerShares Emerging Markets Sovereign Debt (
This is the most popular of the list, giving investors broad
exposure to emerging market sovereign debt by tracking the db
Emerging Markets USD Liquid Balanced Index. This benchmark holds
about 70 different bonds, charging investors 50 basis points a
year in fees while seeing good volume of about 1.2 million shares
Despite holding just a few dozen securities, the ETF is pretty
well spread out, largely thanks to its equal weight approach
which gives the same amount to each nation. This does tilt the
portfolio Europe and Latin America, but the rest of the world
does account for about one-quarter of PCY as well.
The fund does have the highest effective duration on the list
though, coming in at just over nine years. This creates a modest
risk profile when you combine the fact that most of the bonds in
PCY fall into the BBB category or lower (see
Time to Exit Junk Bond ETFs?
Thanks to this higher duration and the bigger allocation to
smaller, more volatile nations, PCY has been the worst performer
out of the group, losing roughly 10.5% in the past month. The
yield hasn't been much of a compensation-at least when compared
to others in the space-as the 30 Day SEC payout comes in at 4.2%,
in line or even lower than others on the list.
All three of these emerging market bond ETFs have seen brutal
trading over the past few weeks, leading to oversold conditions.
Losses are now approaching double digit territory for the past
one month time frame in this space, suggesting that the pain has
been pretty severe.
While this trend could continue for a little bit longer, there
is reason to be optimistic on the space. Many emerging market
countries actually are on pretty solid fiscal footing, and have
enough reserves to withstand outside shocks. Plus, securities in
this space are paying out solid yields at this time, something
that can't really be said for other types of bond ETFs out there
Buy These Bond ETFs for Income and
So if you are looking for a bond play and don't mind some near
term volatility, the emerging market bond world could be worth a
closer look once these securities bounce out of their oversold
territory. The sell-off has likely been too extreme, and there
could be a pop in the near future for investors willing to wade
into this risky, but potentially lucrative space.
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VANGD-TOT BOND (BND): ETF Research Reports
ISHARS-JPM EM B (EMB): ETF Research Reports
ISHARS-EM HYBF (EMHY): ETF Research Reports
PWRSH-EM SVN DP (PCY): ETF Research Reports
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