iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB)

Both iShares J.P. Morgan USD Emerging Markets Bond ETF and Global X Emerging Markets Bond ETF invest in Emerging Market bonds, both government and corporate issued. After reviewing both ETFs, two comparisons are done.  First just using the EM funds; a second comparing the better EM fund against other investing choices for bonds. While the results show EMBD has provided a higher return, long term it has trailed funds invested in other classes of bonds.

I believe the macro environment in 2025 favors emerging market bonds, making Vanguard Emerging Markets Government Bond ETF interesting despite U.S. trade war rhetoric. I believe it's a very representative ETF for the emerging market space, even compared to more widely used ETFs like EMB. Despite President Donald Trump's tariff threats, VWOB has outperformed Treasuries, making the comparison with AGG particularly interesting.

EMB offers diversified exposure to USD-denominated emerging market sovereign and agency bonds, with a balanced mix of investment-grade and high-yield issuances. The ETF provides higher yields than US Treasuries and may serve as a hedge against localized inflation and rate policy, but not against US inflation. Risks include significant exposure to below-investment-grade debt, potential fiscal challenges from US tariffs, and heightened political and economic uncertainties in emerging markets.

Investors are increasingly betting on higher long-term U.S. Treasury yields, due to growing concerns over the nation's rising debt and widening fiscal deficits.

The iShares J.P. Morgan USD Emerging Market Bond ETF (EMB) offers compelling diversification and an attractive yield relative to similar fixed income products. EMB's net expense ratio of 0.39% is reasonable given the limited product availability and higher costs associated with accessing the emerging market bond sector. EMB has delivered solid historical performance compared to other fixed income products with similar levels of risk.

Rising tariff turmoil has sparked a run from credit-sensitive instruments, with escalating trade tensions threatening economic stability. Wednesday's GDP print stoked recessionary fears when it showed the U.S. economy contracted for the first time since early 2022.

EMB's valuation margin of safety has evaporated, with credit spreads significantly below their ten-year average, posing high risks for investors. Half of EMB's holdings are below investment grade, with significant exposure to historically default-prone countries, making it a risky investment. The ETF's high expense ratio and underwhelming performance, with a low Sharpe Ratio, further diminish its attractiveness compared to alternatives.

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EMB is the oldest and largest fund in the emerging market bond sector; Comparing EMB with its peers, the only fund capable of competing is VWOB. VWOB has lower costs compared to its peers and offers better returns. Its interest return is not only higher but also maintains a more consistent growth rate. VWOB tends to have greater exposure to lower-rated sovereign bonds, even though the two funds do not have a significantly different standard deviation.

The EMB ETF is a popular and liquid option for investing in dollar-denominated emerging market bonds. The ETF's performance is influenced by both interest rate and credit risk. Current credit spreads are historically tight, limiting potential upside.

At the end of June, Indian government bonds joined J.P. Morgan's GBI-EM suite of local currency indices in the most significant reconstitution since China's inclusion in 2020.

The NDA has retained power with a reduced majority, sparking concerns over potential policy shifts, but we remain cautiously optimistic. While we expect a continuation of the recent fiscal consolidation trend - aided by the buoyancy in tax collections and the higher-than-expected central bank dividends - we also acknowledge the risk of more populist stance given the new political dynamics.

The EMB has a lot of dollar-pegged exposures, so FX risks and carry trade pressures are avoided to a degree. Other countries benefit from implicit dollarisation, or are dollar-long economies, which limits FX risks on the debts. Even with countries that are reducing rates and are less dollarised, debt levels are relatively low, and country-level commodity exposures are solid. So no broad credit risks.

The iShares J.P. Morgan USD Emerging Markets Bond ETF provides exposure to U.S. dollar-denominated bonds issued by emerging market countries. EMB offers extreme diversification with exposure to over 50 sovereign entities and over 600 bonds, with a portfolio yield to maturity generally above 7%. EMB has underperformed some actively managed EM bond funds, and investors should question whether passive makes sense for this asset class.

Overseas markets, particularly emerging markets, are expected to offer the best stock returns over the next decade. EM stocks trade at historically low valuations compared to the US and other international stocks.

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