Emerging market (EM) assets are benefiting from a post-election rally as investors are now more clear on what the incoming presidential administration will look like. In the meantime, if emerging market assets continue trending higher, consider bond exposure.
“Emerging markets are rallying hard today (November 7) ahead of the FOMC,” said Anders Faergemann, a senior portfolio manager at Pinebridge Investments. “It must be a combination of relief from the event risk of a US election which provided a clear winner and a market environment conducive toward risk.”
Moreover, capital markets expecting the Federal Reserve to continue cutting interest rates should also help boost the case for EM assets. A weakening dollar typically helps the local currencies of EM countries, which are typically tried to the performance of their respective currencies.
EM bonds, in particular, have competitive yields versus more developed countries, making them an attractive option for fixed income investors. However, they must be willing to accept the additional credit risk versus their developed market counterparts.
Given this, as rates fall and yields drop in unison, EM bonds could help fill the void. As such, one fund to consider is the Vanguard Emerging Markets Government Bond ETF (VWOB ).
The fund tracks the performance of the Bloomberg USD Emerging Markets Government RIC Capped Index. The index specifically measures the investment return of U.S.-dollar-denominated bonds issued by governments and government-related issuers in EM countries. As of November 5, its 30-day SEC yield is 6.33%.
Other International Options
Investors who want exposure outside of U.S. borders to international debt, but don’t want the added risk of EM, can consider the Vanguard Total International Bond Index Fund ETF Shares (BNDX ). It seeks to track the performance of the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index. Its portfolio is primarily investment-grade debt, so credit risk is minimized. BNDX features a lower risk profile, so fixed income investors won’t get the yield of VWOB but will get diversified exposure to international debt via developed countries, mainly in Europe.
Those wanting international exposure, but not at the expense of giving up U.S. bond exposure, should consider the Vanguard Total World Bond ETF (BNDW ). The fund seeks to track the performance of the Bloomberg Global Aggregate Float Adjusted Composite Index using a fund of funds. BNDW adds exposure to both BNDX and the Vanguard Total Bond Market Index Fund ETF Shares (BND ) in the convenience of one fund.
For more news, information, and analysis, visit the Fixed Income Channel.
