Emerging Markets Bond Index (EMBI) What is the EMBI? The Emerging Markets Bond Index (EMBI) is a benchmark for measuring the return performance of government and corporate bonds issued by emerging-market countries. EMBI-style indices are widely used to track dollar-denominated sovereign and quasi‑sovereign debt from developing economies and to benchmark funds and ETFs that invest in emerging‑market fixed income. How the index works
* Constituents are typically dollar‑denominated bonds issued by emerging‑market sovereigns and sometimes corporates or Eurobonds. Using a common currency reduces currency‑risk differences between constituents.
* Inclusion criteria usually require minimum liquidity and size thresholds (for example, maturities over one year and outstanding issue sizes above a set dollar amount) and adherence to trading rules.
* Index weighting is generally market‑capitalization based, so larger debt stocks have higher weights unless a diversification rule is applied (see variants below).
* Because emerging‑market issuers often have lower credit ratings, EMBI indices tend to offer higher yields than developed‑market sovereign indices but also carry greater credit, political, and liquidity risk.
Major EMBI variants
* EMBI (original): Introduced to track dollar‑denominated emerging‑market sovereign debt; early versions focused on specific debt types (e.g., Brady bonds).
* EMBI+ : Expanded the original EMBI to include a broader set of dollar‑denominated sovereign debt, Eurobonds, and eligible loans. Selection is tied in part to sovereign creditworthiness and strict liquidity rules.
* EMBI Global : Broader than EMBI+; it uses additional country‑inclusion criteria (such as income brackets and restructuring history) rather than relying solely on sovereign credit rating. It includes a wider set of emerging economies.
* EMBI Global Diversified : Limits the weight of countries with very large amounts of eligible debt by including only a capped portion of those countries’ outstanding face amounts, improving representation for smaller markets.
* EMBI Global Core (index tracked by some ETFs) : A broad, U.S.‑dollar denominated benchmark designed to represent the liquid core of emerging‑market sovereign debt.
Uses and applications
* Benchmarking: Money managers use EMBI indices to evaluate emerging‑market debt performance and to benchmark mutual funds and ETFs.
* Portfolio diversification: Emerging‑market bonds often have return profiles that are less correlated with developed‑market sovereigns and equities, potentially improving diversification.
* Yield enhancement: Higher credit and country risk typically translate to higher yields compared with developed‑market government bonds.
How investors gain exposure
* Mutual funds and ETFs that track EMBI indices provide diversified access to emerging‑market debt without buying individual sovereign issues.
* Example ETF: The iShares JPMorgan USD Emerging Markets Bond ETF (ticker EMB) tracks a JPMorgan EMBI Global Core index. It offers broad dollar‑denominated exposure across many emerging markets and charges an expense ratio in line with similar ETFs.
Risks and considerations
* Credit risk: Emerging‑market sovereigns often have lower credit ratings and greater default risk.
* Political and economic risk: Changes in government policy, geopolitical events, commodity price swings, and macroeconomic instability can materially affect returns.
* Liquidity risk: Secondary markets for some emerging‑market bonds can be thin, increasing transaction costs and price volatility.
* Concentration risk: Market‑cap weighting can concentrate exposure in a few large issuers unless diversification caps are applied.
* Currency exposure: While many EMBI indices are dollar‑denominated, investors in local‑currency funds face additional FX risk.
Key takeaways
* EMBI indices are central benchmarks for dollar‑denominated emerging‑market sovereign and related debt.
* They offer higher yields and diversification benefits but come with elevated credit, political, and liquidity risks.
* Multiple EMBI variants (EMBI+, EMBI Global, EMBI Global Diversified, etc.) balance breadth and representativeness against liquidity and concentration concerns.
* Investors typically access EMBI exposure via mutual funds or ETFs that track these indices; understanding index rules and risks is essential before investing.
Explore More Resources