EM Bond ETFs: Still Ideal Yield Destinations

With news of the Federal Reserve's first interest rate hike of 2016 and just its second in the past decade, 10-year Treasury yields closed at 2.52 percent Wednesday. While that may appear to be a remarkable rise off the less than 1.4 percent seen in early July, there remain fixed income assets and exchange-traded funds with far more compelling yields.

The Fed And EM Bond ETFs

Until recently, emerging markets bond ETFs had been popular destinations for bond investors seeking added yield. However, some of the shine came off the asset class in anticipation of the aforementioned Fed rate hike.

Indeed, the Fed is targeting three rate increases next year, but the iShares JPMorgan USD Emer Mkt Bnd Fd ETF EMB and the PowerShares Emerging Markets Sovereign Debt Portfolio PCY, the two largest emerging markets bond ETFs trading in New York, still sport attractive yields and can potentially endure a hawkish Fed.

“IShares JPMorgan USD Emerging Markets Bond ETF (EMB) is the largest exchange-traded fund for the investment style, with $8 billion in assets. EMB pulled in $3.4 billion in new money year to date, according to data on etf.com. The ETF sports a 12-month yield of 5.1 percent, despite investing 53 percent of its assets in bonds rated BBB or higher,” said CFRA Research in a note out Wednesday.

The Differences Between The 2

PCY, the PowerShares offering, is a different animal than the rival EMB, leading to differences in yield and total returns.

“The second biggest emerging market debt ETF is PowerShares Emerging Markets Sovereign Debt Portfolio (PCY), which has a slightly higher 5.3 percent 12-month yield. Aided by $1.1 billion in net inflows this year, the ETF has $3.8 billion in assets. While PCY is also relatively diversified at the country level, the exposure between these ETFs is different in part because the index that PCY tracks equally weights each country and then screens for liquid bonds that are deemed attractively valued,” noted CFRA.

Worth noting is that EMB holds almost an equal amount of investment-grade and junk debt, a unique feature in the world of bond ETFs. Earlier this year, EMB became the largest emerging markets bond fund in the world, including mutual funds.

CFRA has ratings on five emerging markets bond ETFs, four of which, including EMB, are rated Market Weight. PCY is the only emerging markets debt ETF to earn an Overweight rating from the research firm.