Emerging Market Bond Index (EMBI)
A benchmark index that measures the bond performance of emerging countries and their respective corporate organizations
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What is the Emerging Market Bond Index (EMBI)?
The Emerging Market Bond Index (EMBI) is a benchmark index that measures the bond performance of emerging countries and their respective corporate organizations. The EMBI was first published by leading investment bank J.P. Morgan.
An emerging market is a market economy that is currently in the growth phase. As the entity grows, it becomes more engaged and interacts more with the global market.
Also, emerging markets are considered to be riskier investments because they are still in the development cycle and fluctuate quite frequently.
Summary
- The Emerging Market Bond Index (EMBI) is a benchmark index that measures the bond performance of emerging countries and their relative corporate organizations.
- Emerging markets are economies still within the growth phase and include countries like Russia, Mexico, and China.
- J.P. Morgan operates three of the most popular EMBI indices.
EMBI Indices of J.P. Morgan
The three indices track bond performance in emerging markets that are operated by J.P. Morgan are:
1. J.P. Morgan EMBI+ Index
The EMBI+ Index measures total returns for traded foreign debt instruments in emerging markets. The index provides investors with definitive emerging market external-currency debt information, a compilation of the instruments traded within the market, and their agreed terms.
The regular EMBI index differs from EMBI+ due to USD denominated Brady Bonds, Eurobonds, and loans.
Financial instruments within EMBI+ are required to meet the strict criteria for secondary-market trading liquidity and must possess a minimum face value of $500 million.
2. J.P. Morgan EMBI Global Index
Considered the “expanded” version of EMBI+, EMBI Global also measures total returns for traded foreign debt instruments in emerging countries. It differs from EMBI+ by including USD denominated Brady Bonds, Eurobonds, and loans.
The EMBI Global Index is still required to meet the minimum face value of $500 million but does not need to follow strict criteria for secondary-market trading liquidity. It is essentially a combination of the regular EMBI index and EMBI+.
3. J.P. Morgan EMBI Global Diversified Index
The EMBI Global Diversified Index limits the weights of emerging countries with larger debt stocks. It is done by only including specific portions of current face value amounts of debt outstanding.
Benefits of Investing in Emerging Markets
1. Development and growth
Development and growth are fueled by constant interaction with the global market.
2. Portfolio diversification
Investing in emerging markets is an exceptional way to diversify your portfolio. It is beneficial because an economic downturn in a developed nation can potentially cause growth in others (emerging economies).
Risks of Investing in Emerging Markets
1. Currency
Currencies of emerging markets are seen to be extremely volatile due to conversion rates. In particular, profits can be lessened if the conversion rate is low.
2. Politics
The political structure in emerging markets can be unstable. This can cause serious economic changes and leave the investor with a deficit.
3. Economy
The economic condition of emerging markets differs greatly from developed markets. It is shown through inflation, monetary policies, and low employment.
Top 10 Emerging Market Bonds ETFs
Emerging market bonds ETFs are created through the investment of debt that is issued by emerging market economies. The ETFs are of lower credit quality than those of developed economies. Also, emerging market bonds ETFs tend to provide higher yields.
Here are the top 10 emerging market bonds ETFs in 2020:
- iShares J.P. Morgan USD Emerging Market Bond ETF
- VanEck Vectors J.P. Morgan EM Local Currency Bond ETF
- Invesco Emerging Markets Sovereign Debt ETF
- Vanguard Emerging Markets Government Bond ETF
- SPDR Barclays Capital Emerging Markets Local Bond ETF
- iShares Emerging Markets Local Currency Bond ETF
- iShares Emerging Markets High Yield Bond ETF
- First Trust Emerging Markets Local Currency Bond ETF
- WisdomTree Emerging Markets Local Debt Fund
- SPDR DoubleLine Emerging Markets Fixed Income ETF
The ESG score measures different environmental, societal, and governance standards that companies are expected to follow. When it comes to investing, the ESG score shows the investor the company’s morality.
Here are the ESG scores for the first five companies listed above:
Related Readings
CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:
