💸EMLC: The Yield-Hunting ETF in Emerging Markets

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Hello, ETF UNO readers! While most investing conversations focus on stocks or U.S. Treasury bonds, there are valuable opportunities in countries like Brazil, South Africa, and Indonesia, particularly in emerging market bonds denominated in local currencies.

One notable option is the VanEck J.P. Morgan EM Local Currency Bond ETF $EMLC ( ▼ 0.04% ) . This ETF opens doors to a typically overlooked market segment that can enhance your portfolio's diversification. If you're looking for higher yields outside developed markets and the chance for currency appreciation, consider taking a closer look at EMLC.

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What is EMLC?

EMLC provides targeted access to a specific and often complex segment of the fixed-income market. Here's a breakdown of its core structure and objective.

• 📊An Index-Based Approach: EMLC is not actively managed. It aims to track the performance of the J.P. Morgan GBI-EM Global Core Index, which is a leading benchmark measuring the performance of local currency-denominated government bonds from emerging markets.

• 🔗A Diversified Basket of Government Debt: The ETF holds a portfolio of bonds issued directly by emerging market governments, including those of Brazil, Mexico, and Indonesia. This basket of bonds provides exposure to the credit of these nations, all through a single, tradable security.

• 💵Local Currency Focus: A key differentiator is that EMLC invests in bonds denominated in their local currencies (like the Mexican Peso or Indonesian Rupiah). Local currency setup means both the underlying bond prices and the fluctuations of these currencies against the U.S. dollar drive the ETF's returns.

• ⚙️Built for Accessibility: Launched in 2010, EMLC simplifies a process that is typically difficult for individuals—directly buying foreign government bonds. It handles the operational complexities, such as custody and settlement, offering a convenient and liquid way to gain this exposure.

Investment Strategy📊

How could EMLC fit into an investor’s ETF portfolio strategy?

• 🌐Diversification of Fixed Income Exposure: Many portfolios are heavy in U.S. Treasuries or corporate bonds. Adding EMLC introduces geographic and currency diversification, reducing reliance on a single economy.

• 💹Yield Enhancement: Investors seeking income might pair EMLC with developed market bond ETFs to raise the overall yield of their portfolio.

• 🛡️Inflation Hedge: Local-currency bonds can provide a partial hedge against inflation if emerging market currencies appreciate during times of global inflationary pressure.

• 🛰️Satellite Allocation: EMLC isn’t meant to replace your core bond holdings. Instead, it often works best as a satellite allocation—a smaller, targeted slice of a broader ETF portfolio that adds diversification and growth potential.

EMLC at a glance

ETF Issuer: VanEck

Inception: 2010-07-22

Asset Class: Fixed-Income

Underlying Index: J.P. Morgan GBI-EM Global Core Index

Geographical Focus: Global (Emerging Market)

Expense Ratio: 0.31% (as of last data point)

Dividend Yield: 5.92% (as of last data point)

Distribution Frequency: Monthly

Historical Performance

Performance is where EMLC tells an interesting story.

• Since its launch in 2010, EMLC has faced both successes and challenges. It performed well when emerging market currencies were strong but struggled when the U.S. dollar increased in value. While it has delivered higher yields over time, it has also been more volatile than U.S. Treasuries.

• Returns have been inconsistent in recent years. EMLC benefited when global risk appetite was strong and the Federal Reserve paused rate hikes. However, a strong U.S. dollar in 2022 hurt the ETF as local currencies weakened.

• High coupons provide reliable income that stabilises returns, with investors noticing higher distribution yields compared to U.S. fixed-income ETFs.

ETF Radar View

The radar chart below shows the general characteristics of the ETF:

Top 3 Reasons to Invest

1. Diversification Beyond Developed Markets: To enhance their portfolio and reduce dependence on Western economies, investors should strategically consider adding bonds from emerging markets such as Brazil, Mexico, and Thailand.

2. Potential for Currency Appreciation: If local currencies rise against the dollar, EMLC investors could enjoy a performance boost beyond the bond's coupons.

3. Convenience and Access: Without EMLC, gaining exposure to local-currency EM debt would be challenging for individual investors. This ETF provides easy access through a single, liquid ticker.

Top 3 Reasons Not to Invest

1. Currency Risk: While currency appreciation can be beneficial, depreciation can have a detrimental impact. A strong U.S. dollar environment can drag down returns.

2. Higher Volatility: Emerging markets can be politically and economically unstable, leading to increased volatility. Bond markets may react sharply to elections, policy changes, or geopolitical events.

3. Interest Rate Sensitivity: Like other bonds, EM debt is sensitive to global interest rate moves. Rising U.S. rates often pressure emerging market currencies and bonds.

📈Riding the EM Debt Wave with EMLC

EMLC isn’t your typical bond fund. It takes investors beyond the safe harbours of U.S. Treasuries and into the dynamic, sometimes choppy, but often rewarding waters of emerging market local-currency bonds.

On the plus side, EMLC offers higher yields, diversification, and potential currency gains. On the downside, it is subject to currency risk, volatility, and sensitivity to global interest rates. For investors willing to take a balanced, satellite approach, EMLC can be a valuable tool to spice up the bond side of a portfolio.

At ETF UNO, the best portfolios are both informed and diversified. EMLC shows us that the fixed-income world is far larger than just developed markets. If you’re ready to learn more, share insights, and explore ETFs like this with a community of curious investors, make sure you’re part of the ETF UNO family by subscribing to our newsletter.

DISCLAIMER: This article is for informational purposes only and should not be considered as investment advice. Always conduct your own research and consult with a financial advisor before making investment decisions.