There has been a significant flow of capital into emerging market equities over the past several months. Some of this is “hot money” chasing what speculators consider as the next asset class to provide outsized short term profits. But some of this investment flow is coming from long term investors looking for diversification, income and long term capital gains.
So, what about emerging market bonds? Do they belong in a well-diversified, low cost, passive portfolio? Perhaps. These debt instruments may offer income that is less correlated to the bond markets in the developed markets. However, according to Morningstar, this asset class carries with it risk from currency fluctuations, foreign taxation, economic risk, political risk and differences in accounting and financial standards.
Right now there few ways to invest passively in emerging market debt. However, this will undoubtedly change. One option is the iShares JPMorgan Emerging Market Bond Fund (EMB). http://us.ishares.com/product_info/fund/overview/EMB.htm
I’ll have more to offer on this asset class when research companies (e.g. Morningstar) provide information about the investment characteristics of the funds in this asset class. What is correlation? What are fund expenses? What is the risk? What are the returns?
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