Emerging Markets Bond Funds

Emerging markets bond funds offer individual investors yet another means of diversifying their investment portfolios. However, like international bond funds, mutual funds that invest solely in emerging markets debt currently are not as diverse in their offerings as are domestic bond funds.

These mutual funds invest in the debt securities of companies and governments in those countries whose markets are emergent. As with domestic bond funds, the average quality and duration vary from fund to fund. However, these funds tend to have low average quality ratings, as much of the emerging markets debt is rated below investment grade or not rated at all.

Emerging markets debt provides good diversification but is not as good a diversifier as international bond funds, as the correlation with U.S. equities is slightly greater than that of the international bonds. If you buy these funds for their relatively high yield, you will be sacrificing some degree of diversification and accepting significantly more risk.

You can increase the diversification of your portfolio by selecting funds that do not restrict their investments in the emerging markets to dollar-denominated issues and do not hedge their currency exposure.

Add some emerging markets debt to your portfolio to enhance your diversification and complement your investments in domestic and international bond funds.

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