As rates have fallen, decent income options have become harder and harder to find. Is the iShares JP Morgan USD Emerging Markets Bond ETF (ASX: IHEB) worth the risk?
What Are ETFs?
Exchange-traded funds, or ETFs, are investment funds that are listed on a stock exchange and provide exposure to a range of shares or assets with one purchase.
This Rask Finance video explains ETFs:
iShares Emerging Markets Bond ETF
The iShares Emerging Markets Bond ETF aims to track the performance of the JP Morgan EMBI Global Core Index by investing in US-dollar denominated bonds issued by emerging market governments.
The ETF holds nearly 500 bonds spanning a huge range of countries with the largest allocation to any one country only 5.36% (Mexico).
Other countries the ETF is exposed to include Indonesia, Saudi Arabia, Russia, Qatar and Turkey. Around 56.4% of the bonds have a BBB-rating or higher, making them investment grade, while nearly 43% are rated below BBB (around 0.6% are unrated).
Most of the bonds are long-term with an average maturity of 12.59 years.
In terms of performance, the IHEB ETF has returned 3.71% per year over the last three years, but the last 12 months have been particularly strong with a return of 10.23%. The 12-month trailing yield is 4.33%.
Fees And Risks
The IHEB ETF charges a management fee of 0.51% which is on the higher side for a passive ETF, but the ETF is currency-hedged and maintains a global focus.
This is a very high-risk investment, especially given how many of the bonds are below investment grade. Diversification would reduce this risk somewhat, but nearly half the portfolio is still extremely risky.
With investments spread across so many different countries, there are many different interest rates that could change and impact the value of the underlying holdings. This is certainly not an investment to make lightly.
My Take
I could see some investors making use of this ETF but for most risk-averse investors there are simply better alternatives. There are plenty of bond ETFs with higher credit ratings that are still offering reasonable yields, and there are also a lot of shares ETFs paying dividends around the same rate.
It might be tempting to try something different in today’s low-rate environment, but it’s still so important to stick to what you know.
I’d rather invest in our number one ETF pick in the free report below.
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Disclosure: At the time of writing, Max does not have a financial interest in any of the companies mentioned.
