- Emerging market debt typically offers a higher return than other bonds
- It is best to buy into a fund rather than purchase bonds directly from governments
- Offers a clever way to diversify by investing in the progress of developing regions
Buying bonds offers a smart way to make a fixed return investment. If you choose bonds such as those from the US Treasury or the UK Government then expect a steady if unspectacular return.
However, some of the best returns right now are on emerging market debt bonds. Let’s take a look at what these cover and what some of the best are.
Why Are Emerging Market Debt Bonds More Profitable?
These are bonds based on the loans borrowed by less-developed nations. These are typically from countries in Latin America or Asia, although they can also come from Africa and some European countries too.
The bonds are based on government borrowing, often used to boost the infrastructure or increase industrialisation levels. It isn’t without risk, as countries sometimes default on their loans.
A good example is with Argentina. This country is in the news right now as they struggle to find a way to avoid the ninth sovereign debt default in their history. However, the rewards can be far greater than with other kinds of bond.
You probably won’t buy these bonds directly. To increase liquidity they are usually offered through mutual funds. They will often be grouped geographically, so you could choose a fund that covers a group of neighbouring countries. Or they could cover a diverse range of countries.
These funds will offer variable rather than fixed returns.
Why Is This a Popular Investment?
Emerging market debt offers a great way of diversifying a portfolio. This is because they aren’t closely linked to traditional assets. In times of stock market turbulence or falling commodities, these bonds could provide some welcome good news.
They can also provide excellent returns. A developing country that uses its loans wisely may boost their economy quickly. These bonds offer the kind of profit not seen in most other types of bond.
You can also reduce your exposure to currency risk in this way. Bonds issued in local currencies help you to avoid some of the risk of your local currency falling heavily.
Some of the Best Bonds Right Now
There are numerous funds around that you can choose from. Here are a few that are among the most popular just now.
- Payden Emerging Markets Bond Fund (PYEMX). This fund raked in profits of 9.67% in the last year, with 5.5% over the last three years. It has over $1 billion in assets and mainly covers government-backed bonds from emerging nations.
- Invesco Emerging Markets Sovereign Debt ETF (PCY). In this case, emerging market bonds make up an investment that has earned a modest 1.69% return in the last year. It is packaged as an ETF.
- GMO Emerging Country Debt Fund (GMCDX). At least 80% of this fund is tied to bonds based on the external debt of emerging countries. An 8.74% return has been seen in the last year and it currently has $4.22 billion in assets.
- Franklin Emerging Market Debt Opps Fund (FEMDX). With a return of over 8% in the last year, this is another option worth taking a look at. Again, it looks to always have at least 80% invested in emerging debt bonds.
This type of bond might not be right for all types of investors. Yet, it is a good choice for someone who wants a high degree of diversity and also the chance to earn higher than average returns.