The Year’s Hottest Emerging Market Bond ETF

As emerging markets gain traction among U.S. investors again, this bond ETF is raking in massive assets.

CinthyaMurphy_200x200.png
|
Reviewed by: Cinthia Murphy
,
Edited by: Cinthia Murphy

Demand for exposure to emerging markets has been on the rise in recent months, and one fund that has captured a lot of that interest is a fixed-income ETF, the iShares JP Morgan USD Emerging Markets Bond ETF (EMB).

So far in 2016, EMB has raked in $4.35 billion in net assets—huge inflows for a fund that has $9.7 billion in total assets today. EMB was the fifth-most-popular ETF in July based on creations, and is ranked among the 10 biggest creations we’ve seen year-to-date.

The fund’s performance has a lot to do with its popularity. Compared to the U.S. stock market and an aggregate bond strategy such as the iShares Core U.S. Aggregate Bond ETF (AGG), EMB has seen impressive gains after being stuck in a sideways rut for most of 2014 and 2015. 

 

 

But what’s also driving demand for this fund is its attractive yields at a time when most investors are warming up again to emerging markets, looking for the segment to forge a bottom.

According to emerging market expert Mark Dow, founder of Dow Global Advisors, it may be too soon to buy into emerging market equities because growth remains nonexistent in the region, but fixed income is a different story.

“My asset of choice has been emerging market local fixed income,” he recently said. “Emerging markets are going through a version of what we did with the deleveraging process. You don't want to be in the assets that rely on growth.”

“Currencies should probably stabilize; they'll go up and down a little bit, but they're not going to move dramatically,” he added. “And with emerging market local fixed income, you get the carry, and you get the interest, which you're not going to get in the equities.”

 

What EMB Offers

EMB invests in dollar-denominated emerging market sovereign debt.

It’s not the only fund to do so, but it’s the largest ETF in the segment, with almost $10 billion in total assets—and the most liquid of them all—making it a top pick for ETF traders and investors alike.

EMB is also one of only three funds in this segment that are dollar-denominated—the $800 million Vanguard Emerging Markets Government Bond Index Fund (VWOB) and the $3.8 billion PowerShares Emerging Markets Sovereign Debt Portfolio (PCY) are the other two. 

 

Charts courtesy of StockCharts.com

 

Because EMB is dollar-denominated, it buffers investors from fluctuations in the local currencies. In theory, that protection can be detrimental to U.S. investors when the dollar strengthens, because it increases the fund’s credit risk since it makes it harder for issuers to service their debt, according to ETF.com Analytics.

But so far this year, the U.S. dollar has declined almost 5%.

The fund’s current distribution yield is upward of 5%—more than double the yield of AGG, at 2.1%—and with an equity beta that’s only 0.29—far less volatile than the equity market.

EMB’s biggest country exposures are Mexico, Indonesia and Russia in a portfolio that allocates to more than 30 countries.

EMB isn’t the cheapest ETF to own, carrying a 0.40% expense ratio—more than VWOB’s 0.34% fee and less than PCY’s 0.50%. Still, it remains the favorite this year, raking in $4.3 billion in year-to-date net creations, while VWOB and PCY have gathered $178 million and $751 million, respectively.

Contact Cinthia Murphy at [email protected].

 

Cinthia Murphy is head of digital experience, advocating for the user in all that etf.com does. She previously served as managing editor and writer for etf.com, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.