EMB ETF

EMB is the oldest and largest fund in the emerging market bond sector; Comparing EMB with its peers, the only fund capable of competing is VWOB. VWOB has lower costs compared to its peers and offers better returns. Its interest return is not only higher but also maintains a more consistent growth rate. VWOB tends to have greater exposure to lower-rated sovereign bonds, even though the two funds do not have a significantly different standard deviation.

The EMB ETF is a popular and liquid option for investing in dollar-denominated emerging market bonds. The ETF's performance is influenced by both interest rate and credit risk. Current credit spreads are historically tight, limiting potential upside.

The EMB has a lot of dollar-pegged exposures, so FX risks and carry trade pressures are avoided to a degree. Other countries benefit from implicit dollarisation, or are dollar-long economies, which limits FX risks on the debts. Even with countries that are reducing rates and are less dollarised, debt levels are relatively low, and country-level commodity exposures are solid. So no broad credit risks.

The iShares J.P. Morgan USD Emerging Markets Bond ETF provides exposure to U.S. dollar-denominated bonds issued by emerging market countries. EMB offers extreme diversification with exposure to over 50 sovereign entities and over 600 bonds, with a portfolio yield to maturity generally above 7%. EMB has underperformed some actively managed EM bond funds, and investors should question whether passive makes sense for this asset class.

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A dollar decline should send money into more fringe currencies represented in the EMB. Many of these countries benefit from resource-rich economies and have space to enact favorable policy thanks to lower, stable, and even benign rates of inflation reflecting economic prosperity. A weaker dollar also improves the finances of many of these emerging market sovereigns who may have USD-denominated debt.

The iShares J.P. Morgan USD Emerging Markets Bond ETF offers tactical exposure to EM sovereign debt at compressed prices. EMB has caught a bid at its lows and diverged from other benchmarks, making it a potential short-term investment opportunity. The fund is highly diversified with a 7% 3-year tracking and a distribution of 5.2%, comparable to starting yields on U.S. investment-grade corporates.

India will be added to JPMorgan's emerging market government bond index next year, paving the way for more foreign inflows to the number-five economy.

Both the EMB and EEM funds offer exposure to emerging markets, with the former invested in government bonds and the latter in stocks, but the outlook for bonds is superior. The EMB is also much less volatile and more diversified in terms of country weightings, while the EEM has a huge weighting of Chinese stocks. The EMB is likely to outperform by around 4% annually over the long term, and the bulk of this relative outperformance looks likely to come over the next 12 months.