Emerging Markets Bonds ETF (USD): still appealing
Emerging Markets government bonds in USD are still interesting. These ETF pay a monthly dividend with a gross yield of 4.8%.
With the excess of liquidity created by central banks it is getting more and more difficult to invest in bonds and get a reasonable return.
US Dollar denominated government bonds of Emerging Market countries are an appealing alternative to their counterparts of developed nations. However it is not easy to put in place a balanced portfolio of Emerging Market bonds: some of them have minimum denominations of 100K-200K USD, while others are not traded at the stock exchange of your country. In such a case, ETF can be a great solution instead of buying individual bonds.
ETF Emerging Markets Bonds
The market offers several Emerging Market government USD bonds ETF. These two iShares ETF by Blackrock are interesting:
- iShares J.P. Morgan $ EM Bond UCITS ETF (IE00B2NPKV68) (IEMB)
- iShares J.P. Morgan $ EM Bond EUR Hedged UCITS ETF (IE00B9M6RS56) (EMBE)
They are twins ETF. The first is USD denominated and quoted in other currencies depending from the stock exchange. The second is also USD denominated, but EUR hedged, and is quoted in Euro. If investor's home currency is Euro, the hedge version helps to protect against EURUSD fluctuations.
Dividend is paid each month, which makes it interesting for regular income seekers. Considering the last 12 months distributions, the two ETF respectively had a gross dividend yield of 4.76% and 4.84%. Looks good, but wait, let's have a look at average yield at maturity! For both it is roughly 4.85%. This is ok, that means the underlying bonds are not overvalued.
Both ETF are quite big in size: the first has net assets for 8.45B USD; the second for 3.45B EUR. The total expense ratio (TER) are respectively 0.45% and 0.50%, not terribly cheap, but reasonable considering the number of bonds they manage. Their portfolio includes 468 participations, which contribute to countries and maturities differentiations.
Dealing with passive funds, the participations are defined by an index, in this case the JPMorgan EMBI Global Core Index. The funds are balanced with the index every month.
They include bonds of 35 countries. The average exposures per country is lower than 3%. The countries with the highest exposure, at the moment, are Mexico and Indonesia with around 5% each. Further details in the following chart and of course on iShares website.
The average maturity of the underlying bonds is around 12.5 years, sufficient to be exposed to significant price fluctuations.
These ETF can be of interest both to buy-and-hold investors as well as for speculative traders.
Buy-and-hold investors may choose to place repeated small orders through an accumulation plan rather than one shot order. Accumulation plan over a long term permits to average the buy price.
History suggests Emerging Markets bonds can benefit during periods of monetary easing. Viceversa they are negatively affected by interest rate increase, US Dollar strength, and of course recessionary cycles.
Where are traded
Funds are respectively quoted:
- IEMB in Mexico (MXN), Italy (EUR), Germany (EUR), United Kingdom (GBP, USD, EUR), and Switzerland (USD).
- EMBE in Italy (EUR), Germany (EUR), United Kingdom (EUR), Switzerland (EUR)
Those interested to invest at the US stock exchanges, an equivalent product listed on the NYSE Arca is available. We will review it in the coming days.