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Reasons to Consider A Short Duration EM Bond ETF

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Strengthening developing economy currencies along with a growing economy may continue to support the outlook for ETFs that track emerging market stocks and bonds.

Emerging markets assets, including bonds, are rebounding this year. For investors that want to embrace emerging markets debt with lower duration, the ProShares Short Term USD Emerging Market Bond ETF (CBOE: EMSH) is a credible idea.

EMSH, which is higher by more than 2% this year, tracks the DBIQ Short Duration Emerging Market Bond Index. EMSH’s holdings are dollar-denominated, meaning those bonds stand to benefit as the U.S. dollar declines because financing that debt is easier when the dollar loses value.

“As the recovery in emerging markets starts to abate, bonds are seen as the most resilient asset class amid a dovish Federal Reserve and the mounting prospect of slower global growth,” reports Bloomberg. “Most respondents in a Bloomberg survey of 36 global fund managers, strategists and traders expected developing-nation debt to continue this year’s rebound. They were less sure about the rallies in currencies and equities.”

What’s Next for Emerging Market Economies

Some market observers believe that the weakening U.S. dollar or strengthening emerging currencies helps remove a key risk for emerging market economies with large external debt burdens. Since many emerging debtors borrow in U.S. dollar-denominated debt, a stronger greenback would raise borrowing costs or tighten a developing economy’s financial conditions.

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