Buy These Bond ETFs for Income and Diversification - ETF News And Commentary
April 04 2013 - 8:30AM
Zacks
Investors 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 (EMB) and the
PowerShares Emerging Markets Sovereign Debt Portfolio
(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:
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ISHARS-BR AG BD (AGG): ETF Research Reports
VANGD-TOT BOND (BND): ETF Research Reports
ISHARS-JPM EM B (EMB): ETF Research Reports
PWRSH-EM SVN DP (PCY): ETF Research Reports
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