The EBND ETF allows the investor to have exposure to government bonds, and therefore to buy debt from a number of emerging countries, on short and long maturity bonds that offer a rather attractive return.
The costs of this ETF that is listed on the US market (Nyse) are reasonable at 0.40%. The average yield offered by the ETF's bonds was recently valued at 5.11% while the average maturity of the bonds was 7.47 years.
EBND is also very diversified geographically and holds bonds of some 20 countries, the main weightings being Brazil (12.8%), South Korea (12.4%), Mexico (8.5%), Indonesia (7.4%) and Malaysia (7.3%). The quality of the debt is fairly good with about 46% of bonds rated A and AA (rating average of the three main rating agencies S & P, Moody's and Fitch) and only 17% of ratings are below BAA. In terms of maturity, there is also a great diversification with about 26% invested in short-term (1-3 years), 50% in the medium term (between 3 and 10 years) and 24% in the long term (10 to 30 years).
This ETF seems particularly interesting to us insofar as emerging countries have, on the whole, considerably strengthened their economies and are generally in a much healthier position than developed countries in terms of indebtness and economic fundamentals (growth / deficits). Asian countries in particular have learned the lessons of the emerging debt crisis in 1998 and are in much stronger positions in terms of liquidity and monetary policy, with at the same time economies that are more diversified and less dependent on raw commodities. Yields seem attractive to us, especially in comparison with Europe and the US, which are heavily indebted and appear to be more risky in spite of the size of their economies, while preserving their sheltering character (in particular the US 10 years).
The current context seems very promising for several reasons:
- The yield spread with the developed countries is very important, without being justified by the rather mixed fundamentals of the US and some European countries heavily indebted (France, Italy), coupled with regular budgetary deficit and low growth.
- Emerging countries are much stronger, often fairly indebted and have higher growth.
- The dollar is currently rather weak, which benefits to the currencies of emerging countries
- The rise in US interest rates is very slow and therefore the yields of emerging borrowings remain very attractive
- World growth is fairly balanced between the different zones and seems fairly durable.
The Fed, which foresees a very gradual rate hike due to very moderate inflation, reinforces the favorable short-term environment for emerging countries, which are seeing their currencies strengthened, which should help to encourage the inflow of capital in the coming months. A diversification in government borrowing of emerging markets seems to us to be fairly wise, because of a limited risk and a very significant potential for appreciation, it is also another way to bet on a basket of emerging economies.
