In the current environment, where debt is being issued at historically low interest rates in much of the developed world, many investors may need to rethink the way they view fixed income. Rather than simply focusing on yield to maturity, they may want to look at other potential drivers of return and consider taking a more opportunistic approach. In our opinion, investors might consider fixed income sectors that possess some equity-like growth elements. One option we think is appealing is emerging market local debt.
Consider that this market offers:
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The opportunity to participate in emerging market growth with the potential for less volatility than Emerging Markets equities—these markets have shown faster growth than developed markets and have taken strides to strengthen their balance sheets.
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Comparatively low levels of debt as a percentage of gross domestic product (GDP)
1—as investors in emerging markets reduce their assessment of sovereign credit risk, higher rated sovereigns have been able to finance themselves in local currency debt. This enables treasury ministers to better manage their nations’ liabilities against locally denominated tax receipts, potentially reducing risk.
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The potential for increased sponsorship from institutional investors—with many more traditional options bumping up against allocation limits, many institutional investors are increasingly looking to opportunities in emerging markets. A combination of improving fundamentals and decreased sovereign risk has dramatically increased the investable universe.
All of these factors have helped create increased demand for local currency investments. As demand continues to grow for locally denominated debt and equities, we believe this could also result in currency appreciation against the U.S. dollar. As a result, we think emerging market debt can help investors increase income and potential returns in the current market environment.
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1Compared to developed markets such as the U.S., Europe and or Japan.
Important Risks Related to this Article
There are risks associated with investing, including possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. The Funds focus their investments in specific regions or countries, thereby increasing the impact of events and developments associated with the region or country, which can adversely affect performance. Investments in emerging, offshore or frontier markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation and intervention or political developments. Derivative investments can be volatile and these investments may be less liquid than other securities, and more sensitive to the effects of varied economic conditions. Fixed income investments are subject to interest rate risk; their value will normally decline as interest rates rise. In addition when interest rates fall income may decline. Fixed income investments are also subject to credit risk, the risk that the issuer of a bond will fail to pay interest and principal in a timely manner, or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. Unlike typical exchange-traded funds, there is no index that the Fund attempts to track or replicate. Thus, the ability of the Fund to achieve its objective will depend on the effectiveness of the portfolio manager. Due to the investment strategy of certain Fund’s they may make higher capital gain distributions than other ETFs. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.
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