“No risk, no reward” is a common refrain in capital markets, and it’s no different when it comes to entering the emerging market (EM) bond arena, but there is exchange-traded fund (ETF) options if investors know where to look.
Today, the market environment is even more controversial for investments in emerging markets. Rising global inflation is hurting consumer prices, and that’s not improving with a U.S. Federal Reserve ready to raise interest rates in 2022.
Emerging countries are generally tied to the strength of their currency, especially when it comes to its exchange rate against the US dollar. The greenback has gained ground in recent times as the economic recovery from the ongoing pandemic continues, pushing the US central bank into a position where it can reduce its stimulus measures.
Higher rates, however, mean emerging countries are more at risk. That said, potential investors in emerging market bonds should exercise caution.
“Rising US interest rates are often seen as bad news for emerging market economies (EMEs) because they increase the debt burden, trigger capital outflows, and generally cause tighter financial conditions that can lead to financial crises, ”said one Federal Reserve article Explain.
An emerging bond ETF to consider
An ETF to consider for emerging bond exposure is the Vanguard Emerging Markets Government Bond Index Fund ETF Shares (VWOB). With most of its holdings in debt rated BBB or less, investors should be aware of accepting more risk in order to get more return.
VWOB seeks to track the performance of a benchmark index that measures the investment performance of US dollar denominated bonds issued by governments and government-linked issuers in emerging markets. The fund uses an index investment approach designed to track the performance of the Bloomberg Barclays USD Emerging Markets Government RIC Capped Index.
All of the fund’s investments will be selected through the sampling process, and under normal circumstances at least 80% of the fund’s assets will be invested in bonds included in the index. The fund comes with an expense ratio of 0.28%.
Product summary via Avant-garde website:
- Attempts to track the performance of the Bloomberg USD Emerging Markets Government RIC Capped Index.
- Provides a convenient way to gain additional exposure to emerging market government bonds.
- Maintains a dollar-weighted average maturity consistent with that of the index.
- Passive management using index sampling.
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