3 Emerging Market Bond Indexes You Should Know

Equity and bond indexes are commonly used as performance benchmarks and as a basis for exchange-traded funds (ETFs) and indexed mutual funds. Often, indexes are broken down into different categories based on their desired exposure, such as European indexes, small-cap indexes, or emerging market indexes.

The J.P. Morgan EMBI (Emerging Market Bond Index), EMBI+ (Emerging Market Bonds Index Plus), and EMBIG (Emerging Market Bond Index Global) indexes are designed to help individual and institutional investors benchmark bond performance in emerging markets around the world. Each index covers a different type of emerging market economy.

Here you'll learn about the origins and basic features of these three major market bond indexes, as well as a few other up-and-coming indexes to watch.

A Note on Emerging Markets

An "emerging market" generally refers to a market economy of a country that is in a growth phase. Such countries may or may not be "third world" or "developing" in a larger sense, but these terms have fallen out of favor. For investors, a few hallmark signs of emerging market countries are that they may be dealing with shifting politics, unstable currency, and rapid changes to the economy as a whole. As you might guess, all of these factors make for greater risk. But those who wish to invest with great risk may see great rewards.

Emerging Market Bonds

Emerging market countries sell bonds as debt instruments like any other. Due to the transitional nature of their underlying governments, politics, or economies, emerging market bonds tend to have higher yields than those sold by more developed countries. J.P Morgan was the first to create an index that captured these assets.

EMBI

J.P. Morgan's initial EMBI was launched in 1992, covering so-called Brady bonds, which are dollar bonds issued mainly by Latin American countries. It was later expanded to include dollar loans and Eurobonds. The principal and interest payments on these bonds are made in U.S. dollars rather than a foreign currency. This makes for lower currency risk, which means if you buy these bonds, you won't have to worry about the chance that some value will be lost when you have to exchange them from one currency to another.

EMBI+

The EMBI+ was later introduced to also track total returns for external debt instruments in emerging markets around the world. The "+" (or extra feature) stands for a new set of criteria that bonds in this index have to meet to be listed in this index. They must have a face value of at least $500 million and meet strict liquidity standards for secondary markets.

EMBIG

Shortly after, the EMBIG was launched as the final emerging market bond index. The "G" is for "global," and it is an expanded version of the EMBI+. The EMBIG covers more eligible instruments than the EMBI+ by using less strict limits on secondary market trading liquidity, but it still has a $500 million face value limit. Most large emerging market bond funds now use the EMBIG index as their benchmark when comparing their performance relative to the market.

Emerging Market Benchmarks

Most investors use benchmarks to compare actively managed or passively selective exchange-traded funds or mutual funds with their index peers. For example, if you want to buy an emerging markets bond ETF, you are able to see how it performs against the EMBIG or other J.P. Morgan indexes. The benchmarks can help you compare the two, and figure out how closely the ETF matches the indexes.

Some popular emerging market bond ETFs include:

• iShares JP Morgan Emerging Market Bond Fund (EMB)
• Invesco Emerging Market Sovereign Debt Fund (PCY)
• MarketVectors Emerging Markets Local Currency Bond Fund (EMLC)
• WisdomTree Emerging Markets Local Debt Fund (ELD)

The largest emerging markets bond ETF, the iShares JP Morgan Emerging Market Bond Fund (EMB), uses the J.P. Morgan EMBI Global Core Index as its benchmark. This means that the fund's managers try to mirror the performance of that index as much as possible. Other funds, like the Invesco Emerging Market Sovereign Debt Fund (PCY), use the same underlying index.

Alternatives Indexes

Investors have many options when selecting emerging market bond indexes. While the J.P. Morgan EMBI, EMBI+, and EMBIG indexes may be the most popular, others can offer features that may be better suited to certain situations or types of investors. For example, some indexes are fixed, but some can be customized to relate to the J.P. Morgan benchmarks, with the chance to improve their performance.

Some other popular indexes include:

• DB Emerging Market USD Liquid Balanced Index
• Bloomberg USD Emerging Market Sovereign Bond Index
• Barclays USD Emerging Market GovRIC Cap Index

ETFs and mutual funds can use different benchmark indexes to set themselves apart from the competition. This can also enhance risk-adjusted returns. For instance, some funds may focus on a smaller set of emerging markets and define a more rigid set of standards. Others may broaden the scope to include a wider set.

Tips for Investors

If you want to invest in emerging market bond indexes, be sure that you have a good sense of whether the index suits your own portfolio in terms of scope, risk, and time. Think about the scope of your holdings because this can vary widely. For instance, you might be looking for exposure to only Latin American USD bonds, but some indexes may have broader exposure that extends into Asia.

As well as the underlying index, you should be sure that the actual funds you want to purchase are a good fit for the growths goals of your portfolio and how much risk you are willing to accept. If you are older, with fewer years to invest to reach your goals, you might prefer lower exposure to emerging market bonds than to U.S. market bonds. If you are young, with a longer time horizon, you may be better able to deal with the higher volatility.