Comparing Your Emerging-Markets Bond ETF Options
Should you buy local-currency or U.S.-dollar bonds?
In the past decade investors have embraced international-stock investing, but many of those same people still own all their fixed income in U.S. bonds. When interest rates were higher you did not need to take on the additional risk of international investing. But today, with ultralow interest rates and concerns about the credit quality of the U.S. government and corporations, it may make sense to look to emerging markets for new opportunities.
Emerging-markets debt historically has been very volatile and prone to defaults. Russia defaulted on its debt back in 1998, and both Brazil and Argentina delivered major headaches to investors shortly after the turn of the century. Today, however, the tables have turned. Most pundits are now more worried about developed-world economies, especially in Europe, than those of emerging economies. Many emerging markets have improved their financial stability by abandoning fixed exchange rates, adopting inflation targeting, reducing external debt, and lowering fiscal deficits. By following these sound fiscal and monetary policies, the average debt/gross domestic product ratio of emerging-market countries is less than 50% while the United States' ratio is closer to 100%. As a result there is growing belief that, despite emerging markets' lower credit ratings, they may actually be better credit risks than many developed markets are.
Timothy Strauts does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.