What Is the Emerging Markets Bond Index (EMBI)?

What Is the Emerging Markets Bond Index (EMBI)?

Let me explain what the Emerging Markets Bond Index, or EMBI, really is. It's a benchmark index that measures the total return performance of international government and corporate bonds issued by emerging market countries, but only those that meet specific liquidity and structural requirements. You should know that while these bonds are riskier than those from developed markets, they can bring benefits like portfolio diversity because their returns aren't closely tied to traditional asset classes.

Key Takeaways

Here's what you need to grasp right away: The EMBI tracks the performance of emerging market bonds and was first published by JP Morgan. These bonds are debt instruments from developing countries, offering higher yields than bonds from developed nations. Most of the EMBI focuses on emerging sovereign debt, with some coverage of regional corporate bonds.

Understanding the Emerging Markets Bond Index

An emerging market is a developing country or economy that's advancing toward more sophistication through rapid industrialization and free-market adoption. Think of major ones like Nigeria, China, India, Brazil, South Africa, Poland, Mexico, Turkey, Argentina, and Russia. If you're an investor aiming to capitalize on their growth, you'd look at bonds issued by these governments.

These emerging market debts are sovereign bonds, usually issued in foreign currencies such as US dollars, euros, or Japanese yen. Due to higher economic and political risks, their credit ratings are lower than developed market bonds, which means they offer higher yields to compensate. For instance, the PIMCO Emerging Local Bond Fund returned over 14% in the first nine months of 2017, compared to just 3.1% for the iShares Core US Aggregate Bond ETF. If you're willing to handle the extra risk for exposure to these economies, you'd typically invest through mutual funds or ETFs that follow benchmarks like the EMBI.

How the EMBI Is Used

You use emerging markets bond indexes as benchmarks for bond performance in those markets. The most common ones are JP Morgan's EMBI+ Index, EMBI Global Index, and EMBI Global Diversified Index. The EMBI+ measures Brady bonds, which are dollar-denominated bonds mainly from Latin America, plus dollar-denominated loans and Eurobonds. It builds on the original EMBI from 1992, which only covered Brady bonds. Countries get selected based on sovereign credit ratings, and the index weights by market capitalization of government bonds, but it's strict on liquidity, excluding some markets. For inclusion, debt needs over a year to maturity, at least $500 million face value, and must meet trading guidelines to avoid pricing issues.

EMBI+

The JP Morgan EMBI Global Index extends the EMBI+ with the same criteria, but it doesn't pick countries by credit rating. Instead, it uses a formula combining World Bank per capita income brackets and debt-restructuring history, making it more comprehensive and representative.

EMBI Global Diversified

This version limits weights for countries with large debt stocks by including only a portion of their eligible debt, so bigger markets get lower weights and smaller ones higher compared to the EMBI Global.

Broader Usage and Alternatives

Money managers in emerging market debt often benchmark against JP Morgan indexes, so you'll see them compared to your mutual funds or ETFs. These bonds can outperform US Treasuries significantly due to higher rates. Other indexes include the Barclays USD Emerging Market GovRIC Cap Index, DB Emerging Market USD Liquid Balanced Index, and Bloomberg USD Emerging Market Sovereign Bond Index.

iShares JPMorgan USD Emerging Markets Bond ETF

Launched in December 2007 with iShares, the iShares JPMorgan USD Emerging Markets Bond ETF (EMB) tracks the JPMorgan EMBI Global Core Index. This is a broad, USD-denominated benchmark for emerging markets debt, highly diverse with no single instrument over 2% of holdings, most under 1%. About three-quarters is emerging government debt, the rest high-yielding corporates. The expense ratio is 0.40%, typical for iShares.

This ETF suits you if you're seeking a diversified way into high-yielding fixed income. It holds bonds from 50 countries, including Russia, Mexico, Poland, Hungary, South Africa, and the Philippines.