Regional Political Risk Could Be An Issue For This Emerging Market Bond ETF

Geopolitical volatility is always a consideration when investing in emerging markets, whether the underlying asset is bonds or equities. Latin America is reminding investors of that fact this year and political upheaval in the region could weigh on a popular fixed income exchange traded fund.

What To Know About Latin American Political Volatility

The iShares J.P. Morgan USD Emerging Markets Bond ETF EMB, the world's largest emerging market bond fund, is up nearly 8% year to date and seduces investors with a yield of 5.44%, or almost triple what they get with 10-year Treasuries.

Of course, that yield is part of the compensation for investors get for taking on more risk with emerging markets sovereign debt than they would find with equivalent developed market bonds. That risk is currently rearing its heard.

“Recent political volatility in a number of Latin American countries, including Argentina, Bolivia, Chile, Ecuador and Peru, reflects a broader theme of rising political risk that could amplify negative sovereign credit trends in the regions,” Fitch Ratings said in a recent note.

Why It's Important For EMB

Even when throwing out Bolivia because that country isn't represented in EMB, Latin America's recent bout of political volatility is concerning for the fund. Argentina, Chile, Ecuador and Peru combine for over 8% of the fund's weight.

Until recently, Chile was something of a geopolitical light in Latin America, home to a mostly open and transparent government and economy and one of the least politically volatile nations in the region. That has changed.

“The spate of heightened political volatility in Latin America has included sustained, large-scale demonstrations in Bolivia, Chile and Ecuador that have disrupted economic activity and prompted policy shifts, a constitutional crisis in Peru, and a significant electoral shock that precipitated a financial crisis and sovereign default in Argentina,” according to Fitch.

What's Next Following Protest

With Chile's less volatile status tarnished, that honor should have shifted to Colombia, but on Thursday, citizens in South America's third-largest economy took to the streets, initiating not a revolt, but a referendum on President Ivan Duque, saying far too many have been left behind throw years of mostly solid economic growth there.

Colombian bonds represent 3.31% of EMB's weight. Don't forget that there were recently protests in Uruguay, 2.46% of EMB's geographic exposure.

Investors considering EMB have to hope Brazil and Mexico, Latin America's two largest economies, prove protest proof because those countries combine for 9% of the fund's roster. Overall, Latin America accounts for about 29% of EMB's geographic weight.

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