Emerging market debt is the clear winner in the fixed income space in terms of sales year to date and has shown resilient performance over the period, though flows have also remained strong into high yield and investment trade products.
The latest analysis from TrackInsight compares emerging market bond ETFs with high yield (HY) and investment grade (IG) funds using an in-house methodology.
For each category, ten of the top-performing indexes have been selected, and for each index the best ETF has been identified based on the best three-year rating or, in case of an equal rating or no rating at all, the highest one-year tracking difference (since this is more profitable for the end investor).
The analysis looked at flows over the 12-month period to 31 July 2016, as well as so far this year to 4 August, and also compared the performances of each category. The overall returns from each asset class are presented as the sum of the weighted performances of each ETF within the category.
The figures clearly show emerging market debt ETFs, which include products tracking such indices as J.P. Morgan Emerging Markets Bond Index (EMBI) and the Markit iBoxx USD Liquid Emerging index, have come out as clear winners in terms of flows year to date, and have also outpaced HY and IG products in terms of returns.
The ten emerging market bond ETFs investigated by TrackInsight have collectively taken in €5.2bn YTD, over double the flows seen in both HY and IG ETFs – €2.2bn and €2.7bn, respectively.
Flows into the two latter categories have also been slowing down over the year to date – they were closer to their emerging market bond counterparts over 12 months to the end of July, with HY taking in €3bn, and IG attracting €3.3bn; over the same time period, emerging market bonds had taken in €5.5bn.
The lower inflows into high yield in particular are consistent with its cumulative underperformance over 12 months. It has returned –0.95% over this period (with the weighted performance of all the ETFs in the category rebased to 100 for ease of comparison), compared to a 2.73% return from emerging markets and 2.06% from IG.
However, YTD its performance has picked up, outstripping IG funds, with a cumulative return of 5.06% versus 3.91%, respectively. Emerging market debt still remains the strongest performer over the period, with 6.62%.
In a recent post, TrackInsight highlighted the strong investor demand emerging market debt ETFs had been enjoying in July, as the Federal Reserve once again voted to leave interest rates at a record low.
The bulk of the money was going into dollar-denominated funds, but the recent research suggests local currency debt is also enjoying strong inflows.
The list of top EMD products compiled by TrackInsight includes ETFs tracking the Barclays Emerging Markets Asia Local Currency Government Country Capped index, the PIMCO Emerging Markets Advantage Local Currency Bond index, and the Barclays EM Local Currency Government Diversified index.