This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article features Clayton Fresk, CFA, portfolio management analyst at Georgia-based Stadion Money Management.
The talk of higher interest rates here in the U.S. is seemingly on the forefront of most market participants’ minds. This, combined with the still-anemic interest-rate environment in which we currently reside, has investors looking for alternate sources of income.
There has been much talk about stepping down in quality here in the U.S. via high-yield bonds. Another route that has been discussed is diversifying outside of U.S. fixed income. While developed-market exposure is an option, in the following, I will look at various emerging market bond exposures available in ETF form.
The most popular way ETF investors currently access emerging market bonds (solely based on assets under management) is via dollar-denominated sovereign debt. The three most prevalent names in that space (with performance through Nov. 10) are:
While not exactly the same, the iShares J.P. Morgan USD Emerging Markets Bond (EMB | B-58) and the Vanguard Emerging Markets Government Bond (VWOB | B-34) are more similar to one another than the PowerShares Emerging Markets Sovereign Debt (PCY | B-60). One differential is that VWOB follows an issuer-capped index, so it will have lower exposure to the largest EM issuers (China, Russia, Mexico and Brazil) as compared with EMB.
However, PCY differs from the other two in that it uses a balanced index. The fund currently has equal-weight exposure to 28 different EM countries (which currently excludes China). Using the indexes for PCY (DBLQBLTR) and EMB (JPEICORE), here is a comparison of return and risk since March 1999:
As you can see, the index for PCY has a greater return (and the fund currently has a slightly higher yield than EMB and VWOB), with the trade-off being a bit higher risk as measured by both standard deviation and maximum drawdown.