Bolstering The Case For Emerging Markets Bond ETFs

Just days removed from Great Britain's decision to leave the European Union, also known as “Brexit,” emerging markets probably are not the first destination investors are thinking of. But Brexit is unlikely to stop investors' thirst for yield, and when the dust settles, those investors may want to revisit emerging markets debt and exchange-traded funds such as the iShares JPMorgan USD Emer Mkt Bnd Fd ETF EMB.

Brexit, Federal Reserve And Chasing Yield

Brexit significantly reduced the chances of the Federal Reserve raising interest rates next month or maybe even this year, and data suggest investors are renewing their affinity for emerging markets exchange-traded funds.

The same is certainly true when it comes to ETFs tracking emerging markets sovereign debt. Actually, investors have been enthusiastic about this asset, probably more so than developing world equities, for essentially all of 2016 to this point.

Related Link: Investors Really Like Emerging Markets' Bonds ETFs, Too

On a global basis, tens of trillions of dollars' worth of sovereign debt sports negative yields, meaning investors are losing money in those bonds. Treasury yields keep trickling lower in the United States, and Australia is among the developed markets that could further cut rates.

Bottom line: It is not surprising that investors are embracing an ETF like EMB, which sports a 30-day SEC yield of 4.93 percent.

Take A Second Look At EMB

“In an increasingly low-yield world, emerging markets potentially offer competitively high yields. As an asset class, EM bonds have rebounded in 2016 with the JP Morgan EMB Core Index up 8.33 percent this year (as of 6/17/2016, according to Bloomberg) versus a 0.81 percent return in 2015. Many headwinds from last year dissipated and even turned into tailwinds. These include a U.S. dollar that has weakened since its 2015 rally and stabilizing commodity prices,” said BlackRock in a recent note.

EMB has nearly $7.1 billion in assets under management, making it larger than any other active or passive fund offering exposure to emerging markets debt. EMB has an equivalent trading in Europe that has about $5 billion in assets, making that ETF one of the largest emerging markets sovereign debt funds in the world.

Plus, investors do not have to bite off significant credit risk to enjoy the spoils of EMB's yield advantage.

“Typically, somewhere in the middle because the EM bond universe contains both IG and HY bonds. According to Bloomberg, as of June 15, 2016, more than 60 percent of the issuers in the iShares J.P. Morgan USD Emerging Markets Bond Index are rated investment grade. The asset class represents a combination of corporate and sovereign issuers,” added BlackRock.