Investing in emerging markets exposes investors to interest rate risk, since most existing emerging market bond indexes that portfolio managers are typically benchmarked against have long durations. Due to record high inflation, it’s been a historically bad year for bond market losses, particularly emerging market bonds. Data from ICE BofA index show that broad emerging market bond indexes are experiencing the worst year-to-date performance versus all other broad fixed income indexes.
To address the interest rate risk challenge of investing in emerging markets bonds, BondBloxx Investment Management launched the BondBloxx JP Morgan USD Emerging Markets 1-10 Year Bond ETF (XEMD ). The fund seeks to track the investment results of an index composed of short- to intermediate-term U.S. dollar-denominated, emerging market bonds by excluding bonds with maturities longer than 10 years.
“XEMD is designed to give fixed income investors the ability to better manage their duration exposure when investing in emerging markets debt,” said JoAnne Bianco, client portfolio manager at BondBloxx.
XEMD’s index, the J.P. Morgan EMBI Global Diversified Liquid 1-10 Year Maturity Index, was built without making significant country or sector deviations from the full index. The index is also shorter in duration than other broad market emerging market bond benchmarks, resulting in potential relative performance advantages during a rising rate environment.
In comparison to the broad J.P. Morgan Emerging Market Bond Index Global Diversified Index, the J.P. Morgan EMBI Global Diversified Liquid 1-10 Year Maturity Index is roughly 2.75 years shorter. It’s also materially shorter than Bloomberg’s US and Global Aggregate Indices, as well as the Bloomberg US Corporate Index, while similar in duration to the Bloomberg US High Yield Index.
So far in 2022, broad emerging market bond indexes have been negatively impacted by both rising interest rates and widening credit spreads. Meanwhile, intermediate-term emerging markets have outperformed. In terms of total return performance, XEMD’s index is more than 500 basis points ahead of the broad J.P. Morgan Emerging Market Bond Index Global Diversified Index year-to-date through mid-June.
Launched in October of 2021 to provide precision ETF exposures for fixed income investors, BondBloxx Investment Management was founded by ETF industry leaders Leland Clemons, Joanna Gallegos, Tony Kelly, Elya Schwartzman, Mark Miller, and Brian O’Donnell. The team has collectively built and launched over 350 ETFs at firms including BlackRock, JPMorgan, State Street, Northern Trust, and HSBC.
For more news, information, and strategy, visit the Institutional Income Strategies Channel.