The Emerging Markets Bond Index (EMBI) serves as a crucial benchmark for measuring the performance of international government and corporate bonds issued by emerging market countries. This index was initially introduced by the investment bank JP Morgan, providing investors with insights into the total return performance of bonds in higher-risk but potentially lucrative developing economies.
Key Highlights of the EMBI
- Investment Diversity: Emerging market bonds can diversify portfolios as their returns often do not correlate strongly with traditional asset classes like U.S. equities.
- Higher Yields: Bonds from emerging markets typically yield more than those from developed countries, reflecting their higher risk profiles.
- Composition: While the EMBI index mainly tracks sovereign debt, it also includes a small portion of regional corporate bonds. This means that it encompasses a broad spectrum of fixed-income investment opportunities.
What Constitutes an Emerging Market?
Emerging markets are generally defined as nations in transition toward advanced economies. These countries experience rapid industrialization and the adoption of market-oriented reforms. Notable examples include:
- Nigeria
- China
- India
- Brazil
- South Africa
- Poland
- Mexico
- Turkey
- Argentina
- Russia
Investors are drawn to these nations due to their burgeoning economies that offer the potential for significant returns through bonds issued by their governments.
The Nature of Emerging Market Bonds
Emerging market bonds are primarily sovereign debts issued by governments in these developing economies. Unlike bonds from developed countries, which generally have lower yields and higher credit ratings, emerging market bonds typically:
- Are issued in foreign currencies (most commonly U.S. dollars, euros, or Japanese yen).
- Carry higher yields due to the increased economic and political risks associated with them.
- Must meet specific criteria to be included in the EMBI, including a minimum face value and maturity terms to ensure liquidity.
For instance, a notable example of outperformance is illustrated by the PIMCO Emerging Local Bond Fund, which reportedly achieved a total return of over 14% within just nine months during 2017, compared to only 3.1% for the iShares Core US Aggregate Bond ETF.
Index Variations and Usage
There are several variations of the EMBI:
1. EMBI+
The EMBI+ Index is an extension that specifically includes Brady bonds—dollar-denominated bonds primarily from Latin American countries. This index expands upon the original EMBI, which was launched in 1992, by incorporating broader categories of government debt.
2. EMBI Global
This version of the index does not filter countries based solely on their sovereign credit ratings. Instead, it adopts a more comprehensive approach, incorporating countries with better ratings based on certain economic metrics.
3. EMBI Global Diversified
This index limits the weight of nations with larger debt stocks to prevent excessive concentration. As a result, smaller markets might have a higher representation than larger economies, providing a more balanced exposure to emerging markets.
Other Emerging Market Indexes
In addition to JP Morgan’s indices, other popular indexes include: - Barclays USD Emerging Market GovRIC Cap Index - DB Emerging Market USD Liquid Balanced Index - Bloomberg USD Emerging Market Sovereign Bond Index
These indexes serve as benchmarks for asset managers and help investors gauge the performance of emerging market debt portfolios.
Investment Vehicles
iShares JPMorgan USD Emerging Markets Bond ETF (EMB)
Launched in December 2007, the iShares JPMorgan USD Emerging Markets Bond ETF tracks the JPMorgan EMBI Global Core Index. It is designed for investors seeking high-yielding fixed income through diversified exposure, as no single debt instrument constitutes more than 2% of total holdings. The ETF primarily consists of government debts, with an expense ratio of 0.40%—typical for an iShares fund.
The iShares EMB fund maintains a presence across 50 countries, including significant allocations in Russia, Mexico, Poland, Hungary, South Africa, and the Philippines, catering precisely to those investors willing to accept the extra risk for potentially higher rewards.
Conclusion
The Emerging Markets Bond Index serves as an essential tool for investors looking to tap into the vast potential of developing economies. While they carry inherent risks associated with political instability and economic fluctuations, the potential for higher yields makes them an attractive component of diversified fixed-income portfolios. By understanding its structure and variants, investors can better navigate the complexities of emerging market bonds and make informed investment decisions that align with their financial goals.