iShares J.P. Morgan USD Emerging Markets Bond ETF as Convenient Hedging Tool Amidst Rising Monetary Tightening Tone

Obtaining sectoral exposure to bond market investments – in particular, international high-yield bonds – has always been a sort of challenge for individual portfolio investors. As U.S. Fed increases its pro-tapering rhetoric, all safety looking investors must think hard about best hedging instruments for the stock focused portfolios eyeing growing market correction risks. So safety must always meet convenience.

iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) is one of the largest sovereign EM dollar-linked debt funds with a 3.72% 30-day SEC yield boasting one of the most balanced exposures to fixed income instruments of over 30 countries. With assets topping $20 billion, the fund is one of the most liquid and traded forms of dollar-denominated emerging market bonds across the entire ETF universe. The fund has an intermediate duration profile (8.5 years) and a credit profile that is just slightly tilted towards investment grade. With a robust Sharpe ratio of 0.45, the fund’s worst historical mid-cycle drawdown never exceeded 7.5%.

From a credit rating perspective, the fund is overweight investment grade bonds, with the allocation share for speculative credits being 46.8% of the fund. Since the fund is denoted as "Agency" Corporate EM holdings, that implies rather tangible energy companies allocations where the respective governments usually have controlling stakes. Among the corporate EM names included in the ETF’s list of participants, one can find the likes of Pemex, Petronas and Qatar Petroleum. Irrespective of the current tightening cycle, the fund is fully exposed to interest rate risk, meaning that in a rising interest rate environment the underlying bond prices may go down, so holding EMB in broad investment portfolios infinitely is not a good option.

Given the above-mentioned corporate EM overweight on oil & gas names, we can expect further return yield enhancements as oil prices stabilize and corresponding names get credit rating upgrades. The fund has been fairly sensitive to overall monetary policy moves and was significantly affected by the Fed tightening that occurred in 2018.