The emerging markets theme has been one of the hottest of the new year so far, with equities and bonds alike drawing attention from ETF investors. With the U.S. market anticipating a possible recession this year caused by the Fed’s rate hikes, emerging markets have presented an appealing alternative. For those looking for an emerging markets bond ETF for yields from abroad, a strategy like the American Century Emerging Markets Bond ETF (AEMB) has a case to be considered.
While in the U.S. the tightening process could go beyond a 5% Fed funds rate – with JP Morgan CEO Jamie Dimon notably suggesting rates could rise to 6% in the U.S. if a mild recession kicks in – emerging markets have largely already done their tightening. That creates an environment in which those nations roll over their debt and issue less, an attractive supply and demand dynamic for emerging markets bonds.
Add in that central banks in emerging markets have maintained high real interest rates, and the yields become very attractive. Brazil expects a real policy rate of 7.4% 12 months from now based on current expectations, while Mexico and China expect rates of 4.2% and 1.9% respectively.
AEMB has the potential to navigate the opportunities found in emerging markets bonds thanks to its active approach. The emerging markets bond ETF invests in both investment and non-investment grade government and corporate bonds from emerging markets, primarily denominated in the U.S. dollar but also in local currencies.
The strategy uses a top-down approach and selects securities based on fundamental research, quantitative model inputs, and qualitative considerations like macro factors, country exposure, and issuer credit. AEMB charges a 39 basis point fee for its approach, having added $3.9 million in net inflows over the last five days. The ETF has also outperformed both the ETF Database Category Average and the Factset Segment Average over the last three months, returning 14.2% in that time.
Emerging markets bonds are a hot area right now, with investors picking up a record $39 billion in emerging market sovereign bonds since the start of the year. Investing abroad can be complicated, and for those investors looking at the yield opportunities in developing countries, AEMB and its active, top-down approach may be one ETF to keep an eye on.
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