Bonds and the related ETFs did what they were supposed to do last year. They delivered income, finally reduced correlations to stocks, and added portfolio diversification. Obviously, that’s good news. However, smart investors know that income profiles and performances aren’t linear across the sprawling fixed income landscape. Put simply, some opportunities are “hotter” than others. Emerging markets debt is in the hot, but not too hot category, confirming that ETFs such as the iShares J.P. Morgan EM Local Currency Bond ETF (LEMB) merit consideration.
The $891 million LEMB turns 15 years old in October and follows the J.P. Morgan GBI-EM Global Diversified 15% Cap 4% Floor Index. Home to 435 bonds denominated in local currencies, the ETF is appealing from an income perspective, as it sports a 30-day SEC yield of 5.86%. That’s not the end of this fund’s story. Indeed, more global investors are evaluating emerging markets bonds.
Reasons to Love LEMB
Helped by the weak dollar, emerging markets debt is garnering renewed attention from asset allocators, but there are other factors that augur well for the asset class and funds such as LEMB.
“This large, diverse and liquid asset class now sits at the center of a supportive environment marked by smoother inflation dynamics, cyclical divergence and a softer U.S. dollar,” noted BlackRock. “EMD now represents a sizeable share of global fixed income, with broad issuer and currency breadth across sovereigns and corporates. Importantly, the opportunity set is anchored by an investment-grade core offering of over $1.2 trillion for sovereigns, $1.5 trillion corporates and $3 trillion of local-currency debt — helping to change the quality and size perception of prior cycles.”
Regarding credit quality, LEMB has something to offer risk-averse investors as roughly a third of the ETF’s holdings are rated AA or A and another 41.11% carry other investment-grade ratings.
Another reason LEMB may be appealing to income investors is the aforementioned point about diversification. That’s a trait bonds are supposed to deliver, but it’s not always a foregone conclusion with domestic debt. Fortunately, emerging markets bonds, including LEMB holdings, are a different story.
“The asset class distinguishes itself even more through its inherent differentiation,” added BlackRock. “EM cycles are less synchronized with developed market cycles, reflecting different inflation dynamics, policy regimes and growth drivers. This can provide valuable diversification in multi-asset portfolios. Equally important, dispersion — across countries, sectors and ratings — creates a fertile setting for active alpha via country selection, relative value and idiosyncratic re-pricing.”
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