Published on Feb 15, 2025 5 min read

The 5 Best Emerging Market Bond ETFs for Savvy Investors

Investing in emerging markets is akin to entering an uncharted world of untapped growth. Their constantly changing dynamic economies and developing financial systems serve to attract interested investors who are eager to diversify their portfolios. One of the most popular means of entry into space is through emerging market bond ETFs. These funds come with a mix of returns and diversification as an attractive offering for those with a taste for calculated risk. In this article, let's break down the top five emerging market bond ETFs that deserve your attention, exploring what makes them stand out and why they might fit into your investment strategy.

Understanding Emerging Market Bond ETFs

Emerging market bond ETFs offer easy access to bonds from developing country governments or corporations. These funds seek to capture yields that are generally considered to be significantly higher for these regions than is often available elsewhere while spreading out the risk based on issuers and industries. Rather than purchasing multiple bonds directly, investors pool their resources into one fund.

Why Invest in Emerging Market Bonds?

Investors are drawn to emerging market bonds for their ability to provide diversification and higher income potential. In an era where interest rates in developed markets remain historically low, these bonds stand out for their attractive yields. They also serve as a hedge against economic downturns in developed economies, given their distinct growth trajectories.

Emerging markets like Brazil, India, and Indonesia are projected to experience steady economic expansion over the next decade. By investing in these regions, you're essentially investing in the growth of their middle class, industrialization, and global trade influence. However, it's crucial to evaluate the risks carefully. ETFs are a popular choice because they distribute these risks by investing in a basket of securities rather than placing all your eggs in one basket.

Top 5 Emerging Market Bond ETFs

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

The iShares J.P. Morgan USD Emerging Markets Bond ETF is one of the most established names in the game. With a focus on U.S. dollar-denominated bonds, it mitigates the currency risk associated with emerging markets. This ETF is known for its strong liquidity and broad exposure, holding bonds from countries like Mexico, South Africa, and Turkey.

The EMB is ideal for investors who prioritize stability but still want to tap into the high-yield potential of emerging markets. While its returns may not be the highest on the list, its reputation for reliability has made it a go-to choice for conservative investors seeking fixed-income funds.

Vanguard Emerging Markets Government Bond ETF (VWOB)

Vanguard’s VWOB is a cost-effective option for those looking to invest in government-issued bonds from emerging markets. Like EMB, it focuses on U.S. dollar-denominated securities, providing a cushion against currency volatility. The fund’s low expense ratio is a key attraction, especially for cost-conscious investors.

VWOB’s portfolio leans heavily on countries with relatively stable political environments, such as Malaysia and Chile. This makes it an excellent option for those who want a mix of safety and yield, particularly in uncertain economic times.

VanEck J.P. Morgan EM Local Currency Bond ETF (EMLC)

For investors willing to embrace a bit more risk, the VanEck EMLC offers exposure to bonds issued in local currencies. This fund provides an added layer of diversification by investing in currency appreciation alongside bond yields.

The EMLC is ideal for those who believe in the long-term strength of emerging market currencies. However, it’s worth noting that this added layer of risk can lead to significant volatility, especially during global economic turbulence. Still, for investors with a high-risk tolerance, the potential rewards are hard to ignore.

WisdomTree Emerging Markets Local Debt ETF (ELD)

The WisdomTree ELD is another fund that targets local currency bonds but with a slightly more selective approach. Its actively managed structure allows for greater flexibility in adjusting to market changes, making it a compelling choice for investors who value adaptability.

While the expense ratio is higher than that of other ETFs, active management often justifies the cost. The ELD’s focus on diversification and real-time adjustments provides a level of resilience that can be particularly useful during periods of market instability.

SPDR Bloomberg Emerging Markets USD Bond ETF (EMSH)

Last but not least, the SPDR EMSH is tailored for short-term investors who prioritize liquidity and lower duration. This fund minimizes interest rate risk while maintaining exposure to high-yield bonds from emerging markets.

EMSH is particularly attractive for investors looking for a tactical allocation in their portfolios. Its focus on short-duration bonds means it’s less sensitive to interest rate changes, making it a suitable option in a rising rate environment.

Key Considerations for Choosing the Right ETF

Choosing the right ETF requires more than just looking at returns. Factors like expense ratios, risk levels, and your investment horizon should play a significant role in your decision-making process. For example, funds like EMB and VWOB are better suited for conservative investors, while EMLC and ELD appeal to those with a higher risk appetite.

Another critical factor is the role of currency exposure. U.S. dollar-denominated ETFs like EMB and VWOB offer more stability, while local currency options like EMLC and ELD provide higher risk and reward potential. Ultimately, understanding your financial goals and risk tolerance will help you find the best fit.

Conclusion

Emerging market bond ETFs offer a unique blend of opportunity and risk, making them an exciting addition to any investment strategy. Whether you’re drawn to the stability of U.S. dollar-denominated bonds or intrigued by the potential of local currencies, there’s a fund to match your goals. As you navigate your options, remember to align your choice with your risk tolerance, time horizon, and financial objectives. With the right ETF, you can tap into the vibrant growth of emerging markets while diversifying your portfolio.