The Next Huge Emerging-Market Crazehttp://www.fool.com/investing/etf/2011/10/24/the-next-huge-emerging-market-craze.aspx Dan Caplinger
October 24, 2011
Investors are already quite familiar with the virtues of emerging-market stocks in red-hot growth areas over those of developed countries with sagging economies. But as stock markets around the world have seen lackluster performance, many investors are looking to emerging-market countries for an entirely different reason: to cash in on their bond markets.
Last week, ETF industry leader iShares released a new foreign fixed-income fund, the iShares Emerging Markets Local Currency Bond Fund (NYSE: LEMB ) . Competing against the WisdomTree Emerging Markets Local Debt Fund (NYSE: ELD ) , which started trading in 2010, the iShares ETF is just the latest example of how financial companies are trying to give investors the exposure to higher-income investments they crave.
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At the same time, the risk of a continuing drop in the value of the dollar is very real. Inflation has reared its ugly head in the past year, with the CPI having risen nearly 4%. Although the situation in Europe briefly pushed the dollar upward in a flight away from the endangered euro, any solution to sovereign debt woes on the continent would likely restore the long-term trend against the dollar. The recent S&P downgrade of U.S. debt, along with the Federal Reserve's promise to keep rates low until at least mid-2013, also weigh against the dollar's strength in the coming years.
To address those problems, emerging-market bonds look very attractive. With Brazil taking steps to fight inflation, interest rates there are much higher than in the U.S. -- and when you add the currency appreciation of the Brazilian real, total returns for U.S. investors in Brazilian bonds have been quite strong even considering the recent taxes the government there has imposed on foreign investors. Moreover, in stark contrast to previous conditions, it now appears that many emerging markets are far more economically stable than their developed-world counterparts. That explains the reason for the new ETF; the popular iShares JPMorgan USD Emerging Markets Bond ETF (NYSE: EMB ) gave investors half of what they wanted, but didn't provide local-currency exposure to hedge against a dollar decline.
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