The hunt for yields is common in a low rate environment. This holds good for investors in the U.S. market where yield on the 10-year U.S. Treasury note was hovering around 2.22% as of August 22, 2017, despite two rate hikes this year. As a result, investors turn to emerging market bond ETFs in search of higher yields.
iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB – Free Report) is up about 5% this year (as of August 22, 2017) while PowerShares Emerging Markets Sovereign Debt ETF (PCY – Free Report) is up about 4.6% (read: Why Investors Poured Money into Global Bond ETFs in Q2).
Probably, this is why Direxion launched a leveraged EM bond ETF Direxion Daily Emerging Markets Bond Bull 3X Shares (EMBU – Free Report) .
Inside EMBU
The fund looks to track the daily investment results of 300% of the performance of the J.P. Morgan EMBI Global Core Index. Geographically, the fund’s top three holdings go to Mexico (6.03%), Indonesia (4.96%), Turkey (4.55%) and Russia (4.44%). The net expense ratio of the fund is 1.07%.
The index lowers the weights of countries with higher outstanding debt and puts more focus on countries with lower outstanding debt. It includes both fixed-rate and floating-rate instruments issued by sovereign and quasi-sovereign entities, as per the issuer.
How Does it Fit in a Portfolio?
For investors believing in the emerging market rebound and looking to focus on steady source current income, this fund can be a good choice. The Fed is on a policy tightening mode but U.S. Treasury bond yields are still at subdued levels.
Such low yields are driving investors toward high-yielding EM ETFs. Plus, fixed-income securities are always less risky than equities. Even if EM bond ETFs end up facing capital losses, the regular stream of current income will guard investors’ portfolio. Also, the clip of credit rating downgrades in EMs have slowed in recent times, though worries remain (read: Dollar Denominated EM Bond ETFs: A Good Play for 2017?).
