Emerging Markets Bonds Still Look Good Compared to Treasuries

Emerging markets bonds and the related ETFs are delivering for investors. Meanwhile, other, supposedly more dependable, less risky corners of the bond market are dithering. Market participants can capitalize on that trend with the VanEck Emerging Markets Bond ETF (EMBX), which is coming off an impressive showing last month.

The $267 million EMBX turns 14 years old in July, and is higher by more than 3% year-to-date. It sports a 30-day SEC yield of 5.78% — highly enticing relative to domestic and global aggregate bond ETFs. That’s the tip of the iceberg of this ETF’s advantages.

“Yet again, emerging markets (EM) bonds are outperforming the Global Agg and US Treasuries,” noted VanEck portfolio manager Eric Fine. “Our framing has been that EMs have many strong balance sheets, DMs have none. And EMs have many net exporters, DMs have one – the USA.”

Understanding EMBX Excellence

Part of the EMBX secret sauce boils down to active management — a management style that can be advantageous when it comes to emerging markets fixed income. For one, it creates flexibility. The VanEck ETF can own both corporate and sovereign debt as well as bonds denominated in dollars and local currencies. Conversely, most passive domestic and global aggregate bond ETFs are significantly more rigid.

That rigidity also extends to duration. In fact, many of the most popular passive aggregate bond ETFs are bets on interest rate risk. But as an active fund, EMBX can be more responsive to interest rate trends at a time when emerging markets central banks are more hawkish than their developed market counterparts. EMBX has a duration of 5.51 years, putting it in intermediate-term territory.

“We’ve long described EMs as not subject to fiscal dominance, and they keep acting that way with risks to hawkishness from most EM central banks, so this does not surprise us at all,” added Fine.

Home to 133 bonds, EMBX has recently flexed its flexibility, adding an array of local currency exposure across developing world sovereign and corporate debt. The fund’s managers also cut some local currency allocations in an effort to better position the ETF against the backdrop of the war in Iran.

“We reduced our local currency exposure in Thailand, South Korea, South Africa, Poland, and Hungary. Poland is becoming a fiscally problematic credit, which worsens its economic and policy test scores. The other three countries have significant exposure to the Middle East conflict,” according to Fine.

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