Vangaurd’s EM Bond ETF Surprises With Fixed Income Protection

Investors unnerved by this year’s spate of bank failures understandably are looking for shelter-from-the-storm ideas. Surprisingly, emerging markets bonds could fit that bill.



Consider the case of Vanguard Emerging Markets Government Bond  ETF (VWOB A). One of the largest exchange traded funds dedicated to emerging markets bonds, VWOB is essentially flat on the year, but the fund sports a tempting 30-day SEC yield of 6.79%.

Alone, that yield is impressive, but VWOB could offer investors upside potential. In fact, some experts view emerging markets bonds as attractive in the current environment. In a recent interview with the Australian Financial Review, Pramol Dhawan, head of emerging market debt at PIMCO, extolled a bullish view on emerging markets bonds, citing low default risk, among other factors.


As noted above, default risk currently isn’t a significant overhang across the emerging markets debt universe and VWOB lives up to that billing as more than 56% of its 762 holdings carry investment-grade ratings. Additionally, emerging markets central banks have the policy tools and the governments have the fiscal tools to support bonds.

PIMCO’s Dhawan highlighted India, Indonesia, and Mexico as among the developing nations with attractive bonds. As of the end of April, Mexico, which is Latin America’s second-largest economy behind Brazil, accounted for 10.10% of VWOB’s weight. Only Saudi Arabian debt commanded a higher percentage of the fund’s roster. Indonesia, Southeast Asia’s largest economy, was third at 7.40%.

Mexico is poised to benefit from the reshoring movement. Following the COVID-19 pandemic, U.S. companies are realizing they need to bring supply chains closer to come. Mexico offers the favorable combination of compelling labor costs and proximity to the U.S. Other VWOB constituent markets have benefits of their own.

“Indonesia, which has the world’s largest nickel reserves, is working to become a key player for the electric-vehicle industry as it exports the materials needed for the transition to renewable energy. The country also had a strong institutional framework, making it appealing to foreign investors, Mr Dhawan said,” reported the Australian Financial Review.

The $3.4 billion VWOB’s holdings have an average effective maturity of 12.6 years and an average duration of 7.4 years, according to issuer data. VWOB’s annual expense ratio is 0.20%, or $20 on a $10,000 investment. That’s well below the category average of 0.98%.

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For more news, information, and analysis, visit the Fixed Income Channel.





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// UPDATED ON 29/09
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