Looking Toward Non US Bonds

August 27, 2014


Similar to the question that investors ask themselves on the equity allocation side, a non-U.S. fixed-income investor must also decide on location in which to invest. This may come in the form of developed versus emerging markets, regional exposure, or even country exposure.

The developed versus emerging question is rather easily answered in the ETF space. While some of the aforementioned names cover the developed side of the equation, emerging market exposure is also readily accessed via ETFs.

The behemoth in the space is the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB | B-41), which offers exposure to sovereign debt of the emerging nations. But like in the U.S. and developed markets, an investor can branch out to both investment-grade and high-yield corporate exposure in the emerging space. Funds such as the WisdomTree Emerging Markets Corporate Bond Fund (EMCB | B) and the Market Vectors Emerging Markets High Yield Bond ETF (HYEM | B) make such fine-tuned allocations a reality.

However, the regional- and country-exposure question gets a little trickier.

There have been successful launches in the past few years, notably the WisdomTree Asia Local Debt Fund (ALD | C) and the PowerShares Chinese Yuan Dim Sum Bond Portfolio (DSUM | B). However, the lack of interest in such granular exposure has become evident. Late in 2013, Market Vectors switched its Latin America Aggregate product over to a broad emerging markets aggregate fund.

Additionally, Pimco just announced the shuttering of its suite of country-exposure bond ETFs:

So, the takeaway is that investor demand isn’t fully there yet.


Another factor that must be taken into consideration when investing in the non-U.S. space is currency exposure. Specifically, investors now have more and more opportunities in the ETF world to decide whether they want their currency exposure hedge. On the equity side, this concept has taken off with the proliferation of currency-hedged products.

However, this has not taken yet hold in the fixed-income space.

In emerging markets, rather than hedged versus non-hedged, an advisor can choose from dollar or nondollar-denominated debt. This partially answers the currency question, but the big difference here is the underlying exposure is quite different between a dollar- and nondollar-denominated product.

As the countries that have the ability to issue local versus dollar denominated varies, so will the underlying exposure and quality.

Here’s a quick side-by-side comparison of three local currency emerging market debt ETFs versus that of the dollar-denominated iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB | B-41), with top 10 country exposure noted:


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