Against a challenging backdrop for fixed income, emerging market debt is one area where investors can take on some risk. High yields and portfolio diversification help to make this a compelling exposure within fixed income. However, given persistent US dollar strength, a hard currency approach to emerging market debt makes sense for the near term.
The challenging backdrop for fixed income investors persists. Two themes in the Q2 Bond Compass revolved around defensive positions – remaining short duration, protecting from inflation using TIPS. The third theme looked at how to add some risk with emerging markets (EM). High yields, the cheapness of local currency exposures and the fact that many of the EM central banks had already tightened policy to combat high inflation created some assurances that local markets were further through the process of returning to a more normal policy regime than developed markets.
However, the USD continues to defy gravity and this has caused a notable drag on performance for local currency bonds. For instance, for the JP Morgan EM GBI Global Diversified Index, the returns from currency have been -4.6% for this quarter to date versus -3.2% for price returns.1
For those investors who cannot see an imminent catalyst for a weaker USD, then exposure to hard currency EM debt can offer an alternative option to increase the yield and diversify the portfolio. The SPDR® ICE BofA 0-5 Year EM USD Government Bond UCITS ETF has several advantages:
Yield to Worst and Spread to Treasuries at Elevated Levels for ICE BofA 0-5 Year EM USD Government Bond ex-144a Index
Any hints that the COVID situation in China is easing may gradually cause risk appetite to start to return, which may then result in flows into EM bonds. However, with US inflation still coming in above expectations and the Federal Reserve in full tightening mode (and about to reverse course on its balance sheet expansion), there remain very real risks for most fixed income exposures.
By keeping duration risk low and limiting exposure to EM foreign exchange fluctuations, investors can receive a relatively high yield with fewer sources of risk than a traditional local currency exposure. For EUR-based investors who are uncomfortable with USD exposure, there is also the option of a EUR-hedged version of the ETF.
Investors looking to access hard currency EM debt can do so with a SPDR ETF. To learn more about this ETF, and to view full performance history, please click on the fund name below.
SPDR® ICE BofA 0-5 Year EM USD Government Bond UCITS ETF (Dist)
1 Source Bloomberg Finance L.P. As at 6 May 2022.
2 Source Bloomberg Finance L.P. As at 29 April 2022.
3 Source Bloomberg Finance L.P. As at 6 May 2022.
4 Source: Bloomberg Finance L.P. using Bloomberg composite rating. As of 29 April 2022.
Diversification does not ensure a profit or guarantee against loss.
Information Classification: General Access.
For professional clients use only.
For Investors in Austria: The offering of SPDR ETFs by the Company has been notified to the Financial Markets Authority (FMA) in accordance with section 139 of the Austrian Investment Funds Act. Prospective investors may obtain the current sales Prospectus, the articles of incorporation, the KIID as well as the latest annual and semi-annual report free of charge from State Street Global Advisors Europe Limited, Branch in Germany, Brienner Strasse 59, D-80333 Munich. T: +49 (0)89-55878-400.F: +49 (0)89-55878-440.
For Investors in Finland: The offering of funds by the Companies has been notified to the Financial Supervision Authority in accordance with Section 127 of the Act on Common Funds (29.1.1999/48) and by virtue of confirmation from the Financial Supervision Authority the Companies may publicly distribute their Shares in Finland. Certain information and documents that the Companies must publish in Ireland pursuant to applicable Irish law are translated into Finnish and are available for Finnish investors by contacting State Street Custodial Services (Ireland) Limited, 78 Sir John Rogerson’s Quay, Dublin 2, Ireland.
For Investors in France: This document does not constitute an offer or request to purchase shares in the Company. Any subscription for shares shall be made in accordance with the terms and conditions specified in the complete Prospectus, the KIID, the addenda as well as the Company Supplements. These documents are available from the Company centralizing correspondent: State Street Banque S.A., Coeur Défense - Tour A - La Défense 4 33e étage 100, Esplanade du Général de Gaulle 92 931 Paris La Défense cedex France or on the French part of the site ssga.com/etfs. The Company is an undertaking for collective investment in transferable securities (UCITS) governed by Irish law and accredited by the Central Bank of Ireland as a UCITS in accordance with European Regulations. European Directive no. 2014/91/EU dated 23 July 2014 on UCITS, as amended, established common rules pursuant to the cross-border marketing of UCITS with which they duly comply. This common base does not exclude differentiated implementation. This is why a European UCITS can be sold in France even though its activity does not comply with rules identical to those governing the approval of this type of product in France.The offering of these compartments has been notified to the Autorité des Marchés Financiers (AMF) in accordance with article L214-2-2 of the French Monetary and Financial Code.
For Investors in Germany: The offering of SPDR ETFs by the Companies has been notified to the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) in accordance with section 312 of the German Investment Act. Prospective investors may obtain the current sales Prospectuses, the articles of incorporation, the KIIDs as well as the latest annual and semi-annual report free of charge from State Street Global Advisors Europe Limited, Branch in Germany, Brienner Strasse 59, D-80333 Munich. Telephone: +49 (0)89-55878-400. Facsimile: +49 (0)89-55878-440.
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Accordingly, the Securities shall only be sold in Israel to an investor of the type listed in the First Schedule to the Israeli Securities Law, 1978, which has confirmed in writing that it falls within one of the categories listed therein (accompanied by external confirmation where this is required under ISA guidelines), that it is aware of the implications of being considered such an investor and consents thereto, and further that the Securities are being purchased for its own account and not for the purpose of re-sale or distribution.
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For Investors in Luxemburg: The Companies have been notified to the Commission de Surveillance du Secteur Financier in Luxembourg in order to market its shares for sale to the public in Luxembourg and the Companies are notified Undertakings in Collective Investment for Transferable Securities (UCITS).
Netherlands: This communication is directed at qualified investors within the meaning of Section 2:72 of the Dutch Financial Markets Supervision Act (Wet op het financieel toezicht) as amended. The products and services to which this communication relates are only available to such persons and persons of any other description should not rely on this communication. Distribution of this document does not trigger a licence requirement for the Companies or SSGA in the Netherlands and consequently no prudential and conduct of business supervision will be exercised over the Companies or SSGA by the Dutch Central Bank (De Nederlandsche Bank N.V.) and the Dutch Authority for the Financial Markets (Stichting Autoriteit Financiële Markten). The Companies have completed their notification to the Authority Financial Markets in the Netherlands in order to market their shares for sale to the public in the Netherlands and the Companies are, accordingly, investment institutions (beleggingsinstellingen) according to Section 2:72 Dutch Financial Markets Supervision Act of Investment Institutions.
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United Kingdom: The Funds have been registered for distribution in the UK pursuant to the UK’s temporary permissions regime under regulation 62 of the Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019. The Funds are directed at 'professional clients' in the UK (as defined in rules made under the Financial Services and Markets Act 2000) who are deemed both knowledgeable and experienced in matters relating to investments. The products and services to which this communication relates are only available to such persons and persons of any other description should not rely on this communication. Many of the protections provided by the UK regulatory system do not apply to the operation of the Funds, and compensation will not be available under the UK Financial Services Compensation Scheme.
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Investing in foreign domiciled securities may involve risk of capital loss from unfavourable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations. Investments in emerging or developing markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.
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