Emerging Market Bond Picks To Play For Income and Diversification

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April 9, 2013 12:26pm NYSE:EMB NYSE:PCY

market bondsInvestors now have a plethora of choices for fixed income in the ETF world. There are options that focus in on various subsectors of the U.S. bond market, while international products have also seen big inflows as well.

One especially intriguing segment that many have overlooked is in the emerging market space, specifically for sovereign debt. Funds in this segment are usually tiny (or non-existent) portions of broad bond ETFs like (AGG) or (BND), and thus are probably not in many investor portfolios (see 3 Excellent ETFs for Income Investors).

This is unfortunate, as emerging market sovereign debt ETFs generally are sporting impressive yields (above 3.8%), have great diversification benefits, and the underlying nations generally are in a solid fiscal position. Furthermore, due to relatively high rates in emerging markets, their central banks have greater policy flexibility to either tame inflation or reduce rates and boost bond prices in the process.

Best of all, there are even several options that provide investors exposure to dollar-denominated securities, a great choice when the dollar is seeing strength. This situation helps to prevent currency risk, and could lead to outperformance over local denominated debt when emerging market currencies are slumping.

Emerging Market Bond Picks

Two great options in this space are the JP Morgan USD Emerging Markets Bond Fund (NYSEARCA:EMB) and the PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEARCA:PCY). These two are somewhat similar, but there are few key differences that investors should be aware of before choosing between the two for exposure.

First, PCY is a bit cheaper and a better yielder, with fees of just 50 basis points and a yield of 4.25% in 30 Day SEC terms. This compares favorably to EMB’s 59 basis point cost, and its slightly less robust 30-Day SEC payout of 3.8%.

However, it is also worth noting that EMB is a bit more focused on intermediate term securities, and that its interest rate risk is a bit less. This could make EMB a bit safer than PCY, although this obviously reduces the overall payout (also read Zacks Top Ranked Bond ETF in Focus).

For more information on emerging market bonds, and these two ETFs, watch this short video on the subject below:

This article is brought to you courtesy of Eric Dutram From Zacks.

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