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Federal Reserve Rate Reluctance Drives iShares JP Morgan USD Emerging Markets Bond ETF (EMB)

iShares JP Morgan USD Emerging Markets Bond ETF (BMV:EMB) is an unusual pick for a growth bet. The ETF tracks debt in emerging markets and is generally used by investors to balance the risk/reward in their bond portfolio. The reward so far in 2017 has been pretty great, however. Year to date the ETF has gained around 4.5 percent.

EPFR Global says that money in the US has been flowing into these emerging market bond fund for 20 straight weeks. That’s despite the recent increase in US interest rates. What’s going on here? Normally when a central bank increases rates it attracts money to the country. What’s happening in the US however, appears to be a rebalancing of sorts.

Janet Yellen drives investors to emerging markets

Janet Yellen, for now at least, seems cold on further interest rate rises this year. Inflation just isn’t heading as steadily north as the board of the Fed is looking for. With lower yields to look forward to at home, investors appear to be heading abroad.

Janet Yellen drives iShares JP Morgan USD Emerging Markets Bond ETF (EMB)

Neuberger Berman, in a May report on the bond flows, said that there are fundamental reasons why emerging market funds like the iShares JP Morgan USD Emerging Markets Bond ETF (BMV:EMB)   are moving upwards.

“Growth is more sustainable, current account deficits have been greatly reduced and vigorous reforms are gaining momentum,” wrote Rob Drijkoningen, who handles emerging debt for the firm.

While money flows out of the US and into more difficult, risky markets, some investors may be missing out on the yield chasing funds.

iShares JP Morgan USD Emerging Markets Bond ETF is one of the picks of 2017

Retail investors generally feel much more competent with stocks. They understand the companied to some extent, and they have a good idea of what stock investments look like and how the market moves. Many are, of course, perplexed, when it comes to bonds. They put 20 percent into some bond fund and forget about it.

iShares JP Morgan USD Emerging Markets Bond ETF (BMV:EMB) has shown this year that those ignoring bonds could be missing out on big returns. Stock investors may look down on a 4 percent gain, but it comes with the safety of a lower risk level. The ETF is made up of the debt of a large number of countries, leaving investors diversified against default risk in one emerging market.

If you still don’t know why the price falls when the yield rises, or how to work out what a coupon really means, you can read our beginner’s guide to bond investing. That guide has everything you need to know about valuing ETFs like the Vanguard Emerging Markets Stock Index Fd. If emerging market debt is in for another boom time, now might be the right time to learn.

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Paul Shea

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