Emerging Market Debt in Your Portfolio

The CFA Emerging Market Conference was held in Boston on October 19th.  While I did not attend the conference, I was able to view/read a number of the presentations on the CFAI website.


Tina Vandersteel, from GMO's global fixed income group, had some valuable insights/warnings on emerging market debt:

• When you invest in local emerging market debt, you face the “roach motel risk” of “you can check in, but you can’t check out.” Sometimes currencies can’t be converted.
• “You are picking up pennies in front of the train” when you invest in certain kinds of emerging market debt.
• Invest in emerging market debt for value and diversification, not for “safety,” betting against the U.S. dollar, or an inflation hedge.

I have used iShares JPMorgan Emerging Market Bond ETF (EMB) for emerging markets debt exposure in my own portfolio.  The sole purpose of this fund in my portfolio has been for diversification.  My interest in the asset class has increased more recently as I realized that most emerging market nations have low debt levels, which decreases the chance of default, and are more attractive relative to traditional fixed income asset classes at the present time.  EMB has a 0.60% expense ratio which is higher than most bond ETFs, but is considered a fringe asset class so this is to be expected.  The current yield on the fund is 4.86%.