Emerging Bonds: Income and Growth

08/19/2014 10:00 am EST

Focus: ETFs

Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

Our top income pick this month is a US ETF that seeks to emulate the investment results of an index comprised of about 30 US dollar-denominated emerging market sovereign bonds, explains Gordon Pape, in The Income Investor.

Emerging market interest rates are higher than those in North America and Europe and are likely to stay that way for the foreseeable future.

This means that iShares J.P. Morgan Emerging Markets Bond ETF (EMB) has the potential of providing above-average cash flow (the trailing 12-month yield is 4.4%), as well as possible capital gains.

The issuers include such countries as Turkey, the Philippines, Colombia, Russia, Hungary, Brazil, Venezuela, Indonesia, Poland, Peru, and Mexico. The fact that the bonds are denominated in US dollars provides foreign exchange certainty.

The fund has been having an excellent year with a gain to date of more than 10%. However, it can be quite volatile; it lost 7.4% in 2013 after chalking up four straight years of impressive gains. The five-year average annual compound rate of return to June 30 was 9.6%.

The credit quality of the portfolio is low with only 47.5% of the issues rated BBB or better by Standard & Poor's. So the risk of default is much higher than in a typical Canadian or US bond fund. The debt of countries such as Russia and Venezuela is especially problematic right now.

The fund pays monthly distributions. They vary somewhat but have generally been in the range of US$0.40 to US$0.42 recently.

This ETF is for investors who want exposure to higher-interest bonds and are willing to accept an elevated level of risk. EMB is a Buy for aggressive investors at the current price.

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