A High-Yield Play on Emerging Markets

NEW YORK (FMD Capital Management) -- Emerging market equities have had a tough ride over the last several years. In fact, through the end of 2013, the iShares MSCI Emerging Market Equity ETF (EEM) has a three-year annualized performance history of -2.67%.

That's certainly not a number that inspires a great deal of confidence, especially when you consider that the iShares Core S&P 500 ETF (IVV) has posted a three-year track record of +16.10% over the same time frame. Clearly the hot money has been chasing domestic equities over stocks in emerging nations.

While many market watchers have predicted that we are going to see a rotation from high-priced U.S. stocks to undervalued emerging market countries, I am still not sold on the shift just yet. Instead, I think there is a much more attractive way to get exposure to emerging market countries with less downside risk. My preferred way to play this opportunity is through the credit markets.

The iShares J.P. Morgan USD Emerging Market Bond ETF (EMB) is the largest exchange-traded fund in this space that tracks 229 fixed-income securities in a mix of developing nations. EMB currently has over $3.5 billion in total assets and charges an expense ratio of 0.60%. One of the most attractive qualities of this ETF is its 30-day SEC yield of 5.19% of which dividend are paid monthly. The top three country allocations in EMB are Russia, Mexico and Turkey.

Because EMB has an effective duration of almost seven years, it is typically more sensitive to interest-rate volatility than more short-term bond funds. In fact, it saw quite a bit of volatility in 2013 when it was hit with the double whammy of rising interest rates and falling emerging-market equity prices. However, since that time it has been able to climb steadily higher and is just peaking back above its 200-day moving average.

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