In a low interest-rate world, traditional approaches to building portfolios need tweaking. Yield hungry investors who are willing to take on extra risk should consider emerging-markets debt, particularly dollar-denominated government bonds. Vanguard Emerging Markets Government Bond Index ETF (VWOB, $82.07) is a good choice.
Many emerging economies are beginning to recover post-COVID. That’s reflected in the recent rally in the MSCI EM Index, which tracks stocks in emerging countries. Some countries in particular boast high-quality credit ratings and have been “more disciplined with monetary and fiscal policy,” adds Josh Barrickman, co-head of the U.S. bond index team at Vanguard.
A weaker dollar tends to boost these bonds, too, because it lowers the cost (in local currencies) to service debt denominated in U.S. greenbacks.
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All of that bodes well for this sector. But investors should expect more risk and volatility with emerging-markets debt than with, say, U.S. corporate bonds. “You’re dealing with local economies, politics and things that are often hard to predict,” says Barrickman.
The ETF is an index fund. But a team of credit analysts at Vanguard work to “avoid riskier situations,” says Barrickman, while still tracking the benchmark. In recent years, that has meant sidestepping big stakes in troubled countries such as Venezuela and Ecuador.
Over the past five years, VWOB has returned 6.5% – better than 61% of its peer group.
