While most investors have been focused in on the collapse in the emerging market equity world, there has also been some extremely rough trading in the bond side of these developing nations as well. That is because many investors now seem unwilling to deal with the higher volatility of these securities in a rate environment that could be moving higher.
Furthermore, thanks to the relative illiquidity of emerging market bonds, even a small move south can create a bit of a panic, as investors rush to dump assets in this now-shunned investment type. This has certainly been the case as of late, as literally billions have been taken out of global and emerging market bond funds to start the month, helping to push developing market bond funds to fresh 2013 lows.
Brighter Days Ahead?
While the losses have been pretty bad in the emerging market bond world, pretty much pacing the performance seen on the equity side, there is reason to be optimistic going forward. First, emerging markets countries have by-and-large learned their lessons from previous crises, and thus have ample reserves and relatively low budget issues already (also read The Key to International ETF Investing).
More importantly, the anti-yield trade could be in its last stages—at least for this round—as recent U.S. data suggests that the Fed will not tighten in the near term. The latest jobs report was just so-so and unemployment actually ticked higher, so it will be very difficult to justify a bond tapering with this kind of macro environment.
Given this, we could see a bounce back in this space in the near term, suggesting that investors looking to do some bottom fishing might want to take a closer look at this space. In particular, we have highlighted three emerging market bond ETFs below which could be in prime position for a turnaround once the market calms down and cooler heads prevail (also read Emerging Market ETFs Tumble on Global Worries).
That is because all three of these bond ETFs are among the most ‘oversold’ when looking at the RSI (14) metric in the entire ETF world. In fact, all three have a Relative Strength Index (RSI) reading of less than 15, suggesting they are all due for a bounce in short order.
iShares JP Morgan USD Emerging Markets Bond Fund
This fund follows the JPMorgan EMBI Global Core Index, holding about 200 bonds in its basket. Costs come in at 59 basis points for this fund, while volume is excellent at around one million shares a day.
The fund is well diversified by country, with four nations from around the globe each receiving a little over 6.2%. Investors should also note that the effective duration isn’t too extreme, coming in at 7.3 years.
In terms of recent performance though, the ETF has slumped by about 8.4% in the past month, crushed by the recent series of macro worries. The fund still represents a solid choice from a yield perspective though, as the product has a 4% 30 Day SEC Yield.
iShares Emerging Markets High Yield Bond ETF
For a focus on junk securities, investors have EMHY at their disposal, a fund tracking the Morningstar Emerging Markets High Yield Bond Index. The ETF is a little pricier and less popular though, with fees coming in at 65 basis points a year, and volume below the 50,000 share mark per day.
Still, the ETF is well diversified from an individual security perspective, holding about 200 bonds in its portfolio and devoting just under 2% to each note. Country exposure is a bit more concentrated—with big holdings in Venezuela and Turkey—though the rest is rather well spread out (read Forget BOND, Focus on these ETFs instead).
It is also worth noting that both corporate and sovereign debt is included, so it can be thought of as a broader play on the emerging market space. The ETF is also less on the effective duration front, at just under six years, while the credit rating is a bit less overall for the securities than some of its counterparts on this list.
For performance, this ETF has also struggled in this new type of environment, losing about 8.6% in the past one month alone. It is a better pick from an income look though, giving investors about 5.65% in 30 Day SEC Yield terms.
PowerShares Emerging Markets Sovereign Debt
This is the most popular of the list, giving investors broad exposure to emerging market sovereign debt by tracking the db Emerging Markets USD Liquid Balanced Index. This benchmark holds about 70 different bonds, charging investors 50 basis points a year in fees while seeing good volume of about 1.2 million shares a day.
Despite holding just a few dozen securities, the ETF is pretty well spread out, largely thanks to its equal weight approach which gives the same amount to each nation. This does tilt the portfolio Europe and Latin America, but the rest of the world does account for about one-quarter of PCY as well.
The fund does have the highest effective duration on the list though, coming in at just over nine years. This creates a modest risk profile when you combine the fact that most of the bonds in PCY fall into the BBB category or lower (see Time to Exit Junk Bond ETFs?).
Thanks to this higher duration and the bigger allocation to smaller, more volatile nations, PCY has been the worst performer out of the group, losing roughly 10.5% in the past month. The yield hasn’t been much of a compensation—at least when compared to others in the space—as the 30 Day SEC payout comes in at 4.2%, in line or even lower than others on the list.
All three of these emerging market bond ETFs have seen brutal trading over the past few weeks, leading to oversold conditions. Losses are now approaching double digit territory for the past one month time frame in this space, suggesting that the pain has been pretty severe.
While this trend could continue for a little bit longer, there is reason to be optimistic on the space. Many emerging market countries actually are on pretty solid fiscal footing, and have enough reserves to withstand outside shocks. Plus, securities in this space are paying out solid yields at this time, something that can’t really be said for other types of bond ETFs out there (read Buy These Bond ETFs for Income and Diversification).
So if you are looking for a bond play and don’t mind some near term volatility, the emerging market bond world could be worth a closer look once these securities bounce out of their oversold territory. The sell-off has likely been too extreme, and there could be a pop in the near future for investors willing to wade into this risky, but potentially lucrative space.
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