An emerging market bond exchange-traded fund (ETF) consists of fixed income debt issues from developing economies. This includes government and corporate bonds in Asia, Latin America, Africa and other regions. Emerging market bonds usually offer higher returns than traditional bonds for two main reasons. Firstly, they are riskier than bonds from more developed countries. Secondly, developing countries tend to grow rapidly.
An emerging market ETF enables investors to diversify positions in emerging market bonds like a mutual fund while trading like a stock. If the underlying bonds perform well, so does the ETF (minus costs and expenses). iShares JPMorgan USD Emerging Markets Bond ETF: Launched in December 2007 with the help of iShares, the iShares JPMorgan USD Emerging Markets Bond ETF (EMB) tracks the JPMorgan EMBI Global Core Index. Nearly three-quarters of this index is emerging government debt, with the rest mostly focused on high-yielding corporate bonds. iShares. The ETF is ideal for investors seeking a diversified path to high-yielding fixed income. It has holdings in 50 countries, including Russia, Mexico, Poland, Hungary, South Africa, and the Philippines. SPDR Barclays Capital Emerging Markets Local Bond ETF: The SPDR Barclays Capital Emerging Markets Local Bond ETF (EBND) tracks government debt of emerging market countries in their local currency, adding volatility and arbitrage opportunities. Despite the exchange rate risk, currency conversion can be used as a hedge against the U.S. dollar and potentially enhance returns in low-rate environments. Returns generally correspond to the benchmark EM Local Currency Capped Index minus fees and expenses. The expense ratio is 0.30%. This ETF is attractive to investors interested in Brazil. Invesco Emerging Markets Sovereign Debt Portfolio: An Invesco issue established in October 2007, the Invesco Emerging Markets Sovereign Debt Portfolio (PCY) tracks the DB Emerging Markets USD Liquid Balance Index. Typically, 80% of its underlying assets are in dollar-denominated government debt. The index’s tracking function is unique. All sovereign debt is chosen through a proprietary index methodology and measured against potential returns from a theoretical portfolio. The portfolio is rebalanced quarterly. The PCY ETF has bond holdings in more than 20 countries, including Brazil, Croatia, Mexico, Lithuania, Colombia, Poland, and Slovenia. The expense ratio is only 0.50%. Investors should consider this fund if they want a highly diversified and actively rebalanced portfolio with exposure to emerging market fixed income returns.Vanguard Emerging Markets Government Bond ETF: Vanguard created the Emerging Markets Government Bond ETF (VWOB) to mirror the performance of the Barclays Emerging Markets Government RIC Capped Index. All of the fund’s underlying investments are chosen through a sampling process designed to mirror the holdings and an average maturity of the benchmark. The VWOB ETF is a U.S. dollar-denominated emerging-market debt fund, avoiding any impact from exchange rate risk or currency volatility. It typically has debt holdings with longer maturities and is more sensitive to changes in interest rates. The VWOB has bond holdings in Russia, Mexico, Qatar, Colombia, and Argentina. Like many Vanguard ETF offerings, the Emerging Markets Government Bond ETF has a low expense ratio of only 0.25%. The VWOB is a good option for investors looking for passively managed exposure to emerging market government debt. Market Vectors Emerging Markets Local Currency Bond ETF: Van Eck issued the Market Vectors Emerging Markets Local Currency Bond ETF (EMLC) in 2010. This ETF seeks to capture the returns, before fees and expenses, of the JPMorgan Government Bond Index – Global Core. The EMLC ETF provides investors with exposure to emerging-market government bonds denominated in local currencies. It offers diversification away from U.S. debt. However, the fund, which has nearly $3 billion in AUM, is not hedged against currency exchange risk. The ETF’s country allocation includes Brazil, Thailand, Argentina, South Africa, Dominican Republic, and Mexico. The vast majority of the allocation weightings for each country is less than 1%, and the ETF has an expense ratio of 0.36%.