The overlooked fixed income asset class in ETFs
Advisers are eager to increase their fixed income allocations, ETF provider VanEck believes there is a section within the asset class that is being overlooked in the search for yield.
Research by Fidante found 32 per cent of advisers want to increase their exposure to fixed income amid equity bearishness and an overall defensiveness about the markets. Some 29 per cent of advisers said markets have “further to fall” in the next six months.
But ETF provider VanEck said there is value in considering exposure to emerging markets bonds which have outperformed Australian hybrids, subordinated debt and corporate bonds across one and three years.
While emerging markets have long been viewed as “riskier” for investors, VanEck’s analysis, based on the efficient frontier framework and Sharpe ratio, has shown that an allocation to emerging market bonds can help investors optimise their fixed income portfolios for better risk-adjusted returns.
It noted characteristics typically associated with emerging markets – such as high government debt, large budget deficits and loose monetary policy – are now more accurately seen in developed economies, particularly in light of rising US debt.
Arian Neiron, chief executive at VanEck, said: “2025 has been marked by mass upheaval, and investors are having to challenge some long-held perceptions. The outperformance of emerging market bonds is not a new phenomenon, however geopolitical developments this year have brought alternative exposures into greater focus.
“The superior risk-return profile of emerging market bonds reflects a new reality where the hegemony of developed markets can no longer be taken for granted.”
ETFs investing in emerging market debt include VanEck Emerging Income Opportunities Active ETF, iShares JPMorgan USD Emerging Market Bond ETF, Global X Emerging Markets Bond ETF, and Vanguard Emerging Markets Government Bond ETF.
The appeal of EMD was also echoed by JP Morgan Asset Management (JPMAM) and Federated Hermes, which both said they view opportunities in the asset class.
“The securities we like are primarily rated BB by credit rating agencies and have the fundamental strength to transition to investment grade in the near future. Such countries include Paraguay, Oman and Guatemala,” JPMAM said in its Q2 2025 outlook.
“Whether sovereigns or corporates, we find these BB issuers provide a nice balance of yield pick up versus developed market bonds while remaining shorter duration in these securities provides protection from short-term market volatility.”
Meanwhile, Karen Manna, investment director for fixed income at Federated Hermes, said: “Emerging market debt continues to fare well amid a global easing cycle as many investors reconsider their reliance on the US to include allocations to international and emerging markets alike.”
AUTHOR
Laura Dew
Recommended for you
Australian fund managers are actively seeking to launch Cayman versions of their funds to attract offshore flows, with Regal Partners set to launch its latest offering this month.
With an explosion of private credit managers appearing in the market, two alternatives experts believe a consolidation is needed to maintain the quality of the sector.
Bentham Asset Management has become the latest fund manager to expand its distribution team as it reports increased interest in its credit strategies.
L1 Capital, which is in talks to merge with Platinum Asset Management, has indicated it will be voting against a deal to convert a Platinum LIC into an ETF.
