What are emerging market bond funds?
Emerging market (or EM) international bond funds, like the Emerging Markets Sovereign Debt Portfolio (PCY) and the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB), invest in bonds whose issuers are based in countries whose economies aren’t as advanced as those in developed markets like the U.S. So they don’t include domestic bonds issued by the U.S. Treasury and U.S. companies, which are included in ETFs like the Vanguard Total Bond Market ETF (BND). Examples of EM countries include the BRICS nations—Brazil, Russia, India, China, and South Africa.
Like the developed market bond funds we discussed in the previous part of this series, EM bond funds can also be of two types or a combination of the two types: those that invest in sovereign bonds issued by governments in EM countries, like the Market Vectors Emerging Markets Local Currency Bond ETF (EMLC), and those that invest in corporate bonds, like the iShares Emerging Markets Corporate Bond Fund (CEMB). Some funds invest in both, like the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB).
EMB tracks the JP Morgan EMBI Global Core Index. The index is a broad and diverse U.S. dollar-denominated emerging markets debt benchmark that tracks the total return of actively traded debt instruments in emerging market countries. EMB provides exposure to U.S. dollar–denominated sovereign debt and corporate debt issued in over 30 emerging markets. With an expense ratio of 0.6%, EMB has net assets of ~$4 billion (as of April 30). ~81% of EMB holdings are invested in sovereign bonds and agency or quasi-agency debt and ~18% in corporate bonds.
An ETF that invests in investment-grade government debt issued by governments of EM countries is the Emerging Markets Sovereign Debt Portfolio ETF (PCY). PCY tracks the DB Emerging Markets USD Liquid Balanced Index. The index tracks the potential returns of a theoretical portfolio of liquid emerging markets U.S. dollar–denominated government bonds issued by approximately 22 emerging-market countries. PCY will normally invest at least 80% of its total assets in U.S. dollar–denominated government bonds from emerging market countries that comprise the index. Country selection in the index is revisited annually using a proprietary index methodology and the membership list is rebalanced quarterly.
To learn how international bond funds can help investors in reducing portfolio risk, please read on to the next part of this series.