Normalizing yield curves, easing monetary policy in the U.S., and a weakening dollar are just a few macro factors that hit the bond markets in 2025. The latter carved a path for emerging market (EM) bond strength last year, giving them the “wow” factor relative to their fixed income peers. Can it happen again in 2026?
First off, just how well did EM bonds do against the vast bond market space? They blew the doors off the entire fixed income market, according to fund performance data from Morningstar.
“The typical fund in the emerging-market bond category, a group of strategies that invest more than 65% of assets in foreign bonds from developing countries, gained 2.88% during the quarter, while its emerging-market local-currency bond counterpart, which takes more foreign-currency risk, gained 3.38%,” noted Vanguard.
As far as the new year goes, a weakening dollar in 2026 could continue to make EM bonds an enticing fixed income allocation. If the U.S. Federal Reserve continues to cut rates, fixed income investors seeking additional yield could also look at EM bonds.
ETFs can capture broad EM exposure with the benefits inherent in the investment vehicle like cost effectiveness, tax efficiency, and trading flexibility. Indexed options to consider include the Vanguard Emerging Markets Government Bond ETF (VWOB ), VanEck Vectors Emerging Markets Local Currency Bond ETF (EMLC ), and the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB ).
The Active Alternative
With its own unique set of nuances and idiosyncratic risks, international bonds maybe be best left to portfolio managers who know how to navigate the complexities inherent in this corner of the bond market. With that, there are active EM bond ETFs worth considering as well.
Active managers have the ability to adjust the holdings of the fund to align with current market conditions. That makes them all-weather options regardless of the macro environment. In essence, this adds a built-in risk component that can help mitigate downside risk in a volatile EM bond market. Meanwhile, it also captures alpha from active managers who can identify opportunities in EM bonds.
Active EM bond ETF options include the SPDR DoubleLine Emerging Markets Fixed Income ETF (EMTL ). To identify opportunities, EMTL uses a five-step approach that leverages bottom-up research with sovereign macro overlays.
Cost conscious investors may want to consider the Global X Emerging Markets Bond ETF (EMBD ). The fund utilizes the experience of Global X portfolio managers with extensive track records in maximizing EM debt strategies.
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