What Is the Emerging Markets Bond Index (EMBI)?
The Emerging Markets Bond Index (EMBI) serves as a benchmark for assessing the total return performance of international government and corporate bonds issued by emerging market countries that adhere to specific liquidity and structural requisites. Although these bonds carry increased risks compared to those from developed nations, they offer several advantages, such as enhanced portfolio diversity due to their lack of strong correlation with traditional asset classes.
Key Takeaways
- The Emerging Markets Bond Index (EMBI) tracks the performance of bonds issued by emerging markets, first introduced by JP Morgan.
- Emerging market bonds typically offer higher yields than bonds from developed nations.
- The benchmark EMBI index primarily tracks sovereign debt, supplemented by regional corporate bonds.
Embracing the Potential of Emerging Markets Bonds
Emerging markets are countries or economies progressing toward advanced industrialization and embracing free-market structures. Some of the largest emerging markets include Nigeria, China, India, Brazil, South Africa, Poland, Mexico, Turkey, Argentina, and Russia. Investors seeking to benefit from the rapid growth in these regions often turn to bonds issued by their governments.
Emerging market bonds, or sovereign debt, are typically issued in foreign currencies like US dollars, euros, or Japanese yen. Due to the higher economic and political risks in these countries, their credit ratings are generally lower than those of developed-market bonds leading to higher yields to compensate investors for these risks. For instance, the PIMCO Emerging Local Bond Fund yielded over 14% in the first nine months of 2017, while the iShares Core US Aggregate Bond ETF gained just 3.1% over the same period.
Investors looking to gain exposure to these economies, while accepting higher risks, often pursue mutual funds or exchange-traded funds (ETFs) tracking benchmark indexes like the EMBI.
Utilization of the EMBI
Emerging market bond indexes are pivotal benchmarks for bond performance in these regions. The most notable among these are the JP Morgan EMBI+, JP Morgan EMBI Global, and JP Morgan EMBI Global Diversified indexes. The EMBI+ Index measures Brady bonds, along with dollar-denominated loans and Eurobonds, and focuses on countries selected based on sovereign credit ratings.
More About EMBI+ Index
The JP Morgan EMBI Global Index extends the parameters of the EMBI+ Index by including countries based on a combination of World Bank-defined per capita income brackets and their debt-restructuring histories, making it broader and more representative.
The EMBI Global Diversified Index, on the other hand, limits the weights of larger countries with significant debt stocks by only including a specified portion of their debt. This allows for a more balanced representation, increasing the weight of smaller markets.
The JP Morgan indexes are critical benchmarks for money managers dealing in emerging market debt. Because of their higher interest rates, emerging market bonds often substantially outperform U.S. Treasury bonds. Other notable indexes include the Barclays USD Emerging Market GovRIC Cap Index, DB Emerging Market USD Liquid Balanced Index, and Bloomberg USD Emerging Market Sovereign Bond Index.
iShares JPMorgan USD Emerging Markets Bond ETF: A Gateway to Diversification
Launched in December 2007, the iShares JPMorgan USD Emerging Markets Bond ETF (EMB) tracks the JPMorgan EMBI Global Core Index. This diverse, U.S. dollar-denominated benchmark includes a mix of government and corporate bonds from across emerging markets.
Investment Insights
With nearly three-quarters of the EMBI Global Core composed of emerging government debt and the remainder in high-yielding corporate bonds, this ETF offers a diversified route into high-yield investments. Notable holdings span 50 countries, including Russia, Mexico, Poland, Hungary, South Africa, and the Philippines.
For those seeking a diversified path to high-yield fixed income, the iShares JPMorgan USD Emerging Markets Bond ETF represents an optimal choice, combining broad market exposure with controlled risk diversification, at an expense ratio of 0.40%.
Related Terms: sovereign debt, benchmark index, credit rating, mutual funds, ETFs.
