An emerging market bond exchange traded fund (ETF) is comprised of fixed income debt issues from countries with developing economies. These include government bonds and corporate bonds in Asia, Latin America, Africa and elsewhere. Emerging market bonds normally offer higher returns than traditional bonds for two major reasons: they tend to be more risky than bonds from more developed countries; and developing countries tend to grow rapidly. Perhaps more importantly, emerging market funds do not correlate with traditional asset classes.

An emerging market ETF allows investors to diversify positions in emerging market bonds like a mutual fund, yet it trades like a stock. If the underlying bonds in the ETF perform well, so too does the ETF (minus the fund’s costs and expenses).

iShares JPMorgan USD Emerging Markets Bond ETF

Launched with the help of iShares in December 2007, the iShares JPMorgan USD Emerging Markets Bond ETF (EMB) tracks the JPMorgan EMBI Global Core Index. EMBI Global Core is a very broad, U.S.-dollar denominated, emerging-markets debt benchmark. It is also highly diverse – no single debt instrument comprises more than 2% of total holdings, and most fall short of 1%. Nearly three-quarters of the EMBI Global Core is emerging government debt, with most of the rest focused on high-yielding corporate bonds. The expense ratio is in line with what you’d expect from an iShares ETF at 0.60%.

The iShares JPMorgan USD Emerging Markets Bond ETF is best suited for investors who don’t mind exposure to BB- debt (AKA junk bonds) and are looking for a diversified path to high-yielding fixed income.

SPDR Barclays Capital Emerging Markets Local Bond ETF

This ETF only tracks government debt for emerging market countries. It also tracks them in their local currency, which adds volatility and arbitrage opportunities. Based on the Barclays Capital EM Local Currency Government Capped Index, the SPDR Barclays Capital Emerging Markets Local Bond ETF (EBND) historically has a very good bid/ask when compared to other local currency-denominated, high-yield bond ETFs.

The returns of EBND should generally correspond to the price and yield performance of its benchmark EM Local Currency Capped Index, minus fees and expenses. The expense ratio is 0.50%. This ETF is particularly attractive to investors who want exposure to Brazil.

PowerShares Emerging Markets Sovereign Debt Portfolio

An Invesco PowerShares issue, the PowerShares Emerging Markets Sovereign Debt Portfolio (PCY) was established in October 2007. This ETF tracks the DB Emerging Markets USD Liquid Balance index, which normally has 80% of its underlying assets in dollar-denominated government debt.

The tracking function of the DB Emerging Markets USD Liquid Balance Index is somewhat unique. All sovereign debt in the index is chosen through a proprietary index methodology and subsequently measured against the potential returns from a theoretical portfolio. The entire portfolio is rebalanced quarterly.

Despite this seemingly active management, the ETF expense ratio is only 0.5%. 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 average maturity of the benchmark.

Like all Vanguard ETF offerings, the Emerging Markets Government Bond ETF has a very low management fee (0.05%) and distribution fee (0.29%) for a total expense ratio of only 0.34%. This is a good option for investors looking for passively managed exposure to emerging market government debt.

(For more, read Can I buy emerging market bonds on my Roth IRA?)

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. Unlike the iShares J.P. Morgan USD Emerging Markets Bond ETF, the Market Vectors ETF trades at a relatively cheap price with high volume and fewer management fees.

The Van Eck fund is also highly concentrated. Most of its holdings are centered in Brazil and the Russian Federation. This is a great ETF for newer investors due to its simple holdings and competitive bid/ask.

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