Emerging markets have the luxury of a policy cushion

Chart 1: Emerging markets and developed markets - Fiscal Balances and Debt/GDP ratios	Chart 2: Policy rates in major emerging markets and developed markets (%)

Chart 1: Source IMF, Bloomberg, as of December 2022, Chart 2: Source: VanEck, Bloomberg, as of May 2023.

You can see in chart 2 above, the current global tightening cycle was led by emerging markets, which started hiking earlier and larger than the Fed and RBA in order to address rising inflation pressures. As a result, their hikes were not needed to be as fast resulting, for the most part, in a smoother hiking cycle, with many now on hold or cutting.

This has resulted in higher real policy rates in emerging markets and developed markets.

Chart 3: Emerging markets real policy rates are higher compared to developed markets 

Source: VanEck Research; Bloomberg LP. Data as of April 2023. Past performance is not indicative of future results.

There is also strong structural support for emerging markets. Emerging markets generally exports more than it imports and benefits from high commodity prices and the advent of the petroYuan and petroRupee forces central banks involved to purchase emerging market bonds. 

As with anything – it pays to be selective

Despite the sound fundamentals and structural tailwinds, many Australian investors do not have an allocation to emerging market bonds as a tool to enhance their yield. Based on old beliefs, there are a number of reasons why investors may not have an allocation to emerging market bonds.

Stories like Argentina’s gargantuan +1000bps (!) move in late April, highlights that emerging markets bonds are not a monolith. What you may have missed is that several emerging markets outside of China are testing the waters with rate cuts – Uruguay, Costa Rica and Hungary for example. Many remain on hold.

The point is many emerging markets’ central banks have room to move. Therefore, when selecting which emerging market bonds to include in your portfolio it pays to be selective.

We think, to take full advantage of the opportunities within emerging market debt, it is necessary to take an unconstrained active approach, to avoid having the highest weighting to indebted, poorly run nations.

Stellar performance: emerging market bonds have outperformed global bonds

The VanEck Emerging Income Opportunities Active ETF (Managed Fund) (EBND) takes an active, high conviction and benchmark agnostic approach to investing across the emerging market bond spectrum (the benchmark is 50% J.P. Morgan Emerging Market Bond Index Global Diversified Hedged AUD and 50% J.P. Morgan Government Bond-Emerging Market Index Global Diversified).

To illustrate the above, Table 1 below demonstrates that our active approach has not only outperformed the Benchmark, the VanEck Emerging Income Opportunities Active ETF (Managed Fund) (EBND) has also outperformed the Bloomberg AusBond Composite Bond 0+ Yr Index and the Bloomberg Global Aggregate Index Hedged into AUD index.

Table 1: Trailing returns

Source: Bloomberg, VanEck. EBND inception date is 11 February 2020.
Benchmark is 50% J.P. Morgan emerging Market Bond Index Global Diversified Hedged AUD and 50% J.P. Morgan Government Bond emerging Market Index Global Diversified. Australian Bond Index is Bloomberg Aus Bond Composite 0+ Years. Global Bond Index is Bloomberg Global Aggregate Index Hedged into AUD. The table above shows past performance of the Fund from its Inception Date. Results are calculated to the last business day of the month and assume immediate reinvestment of distributions. Fund results are net of management fees and costs, but before brokerage fees or bid/ask spreads incurred when investors buy/sell on the ASX. Returns for periods longer than one year are annualised. Past performance is not a reliable indicator of current or future performance which may be lower or higher.

Diversification benefits: Emerging market bonds are a diversifier within a global bond portfolio

Another reason to consider emerging market bonds is their diversification benefits. The correlation between emerging market bonds and global aggregate bonds is modest (0.51), signifying potential diversification benefits when adding emerging market debt to a global bond portfolio.

Table 2: Modest correlation with global and Australian bonds

Source: Morningstar Direct, 30 April 2023.
Australian Bond Index is Bloomberg Aus Bond Composite 0+ Years. Global Bond Index is Bloomberg Global Aggregate Index Hedged into AUD. You cannot invest directly in an index. Past performance is not a reliable indicator of current or future performance which may be lower or higher.

Monthly income: 5% p.a. target yield

EBND pays dividends monthly. EBND has a target dividend yield of 5% p.a.* As it is a fully transparent active ETF, EBND will trade close to its fair value because it is supported by an external market maker, which facilitates liquidity.

EBND statistics:

Source: VanEck. Yield measures are not a guarantee of future dividend income from the funds.

VanEck’s EBND advantage

EBND enables investors to access an actively managed and diversified portfolio of emerging market bonds via a single trade on ASX. VanEck manages in excess of US$4 billion in emerging market fixed income assets globally and has been investing in emerging markets since 1993. The depth and breadth of VanEck’s experienced emerging market bond team is unparalleled. The team has an average of over 20 years of investing experience across a variety of market conditions and stages of the economic cycle. 

Key risks

An investment in the Fund carries risks associated with: ASX trading time differences, emerging markets bonds and currencies, bond markets generally, interest rate movements, issuer default, currency hedging, credit ratings, country and issuer concentration, liquidity, fund manager and fund operations. See the PDS for details.