An emerging market bond exchange traded fund (ETF) comprises 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 typically offer higher returns than traditional bonds for two primary reasons: They tend to be riskier than bonds from more developed countries, and developing countries tend to grow rapidly.
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 0.40%.
The iShares JPMorgan USD Emerging Markets Bond ETF is best suited for investors are looking for a diversified path to high-yielding fixed income. The fund has holdings in 50 countries, including in allocation in Russia, Mexico, Poland, Hungary, South Africa and the Philippines.
SPDR Barclays Capital Emerging Markets Local Bond ETF
The SPDR Barclays Capital Emerging Markets Local Bond ETF (EBND) tracks government debt for emerging market countries. It also tracks them in their local currency, which adds volatility and arbitrage opportunities. Although the EBND has exchange rate risk associated with it, the currency conversion can be used as a hedge against the U.S. dollar while potentially enhancing current returns in low rate environments.
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 0.40%. 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 typically 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. The PCY ETF has bond holdings in 30 countries, including Brazil, Croatia, Mexico, Lithuania, Colombia, Poland and Slovenia.
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 an average maturity of the benchmark.
The VWOB ETF is a U.S. dollar-denominated emerging-market debt fund, meaning it avoids any impact from exchange rate risk or currency volatility. The fund typically has debt holdings that have longer maturities and as a result are more sensitive to changes in interest rates. The VWOB has bond holdings in Russia, Mexico, Qatar, Colombia and Argentina.
Like many Vanguard ETF offerings, the Emerging Markets Government Bond ETF has a low expense ratio of only 0.32%. The VWOB is a good option for investors looking for passively managed exposure to emerging market government debt.
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.
The EMLC ETF provides investors with exposure to emerging-market government bonds denominated in local currencies. The EMLC offers diversification away from U.S. debt. However, the fund, which has nearly $4.3 billion in AUM, is not hedged against currency exchange risk.
The ETF's country allocation includes Brazil, Thailand, Argentina, South Africa, Dominican Republic and Mexico. The vast majority of the allocation weightings for each country is less than 1%, and the ETF has an expense ratio of 0.30%.
(For more on emerging markets, please read Can I buy Emerging Market Bonds on My Roth IRA?)