At Solitude Canyon, clients with more aggressive portfolios own Emerging Market debt as a portion of their bond portfolios.  Emerging Markets include countries like Colombia, Brazil, South Korea, Poland, Peru, Indonesia, Turkey and Chile.  These countries all have one thing in common:  a growing middle-class.  A growing middle-class helps increase income,  expand employment opportunities, improve infrastructure and bolster home/office construction.  Basically, life gets better and opportunity abounds. 

However, investing in Emerging Market government-issued debt has more advantages than just a growing economy.  First, interest rates are much, much higher than what you'll get investing in U.S. Treasury bonds.  Second, Emerging Market economies are, generally, in much better shape (i.e. much lower debt, faster growth and lower unemployment) than the large, developed western economies such as the United States.  Finally, the aforementioned improving economic statistics often leads to an appreciating local currency which adds a final boost to your Emerging Market investment.

Previously, Emerging Market debt investment vehicles selected bonds in the biggest debtor countries.  How illogical is that?  It makes much more sense to allocate your investment more heavily toward countries that are in better economic shape, not worse. 

Thanks to the good people at Wisdom Tree, we now have that opportunity.  They've recently launched an Exchange Traded Fund called the Wisdom Tree Emerging Market Local Debt Fund, ticker symbol ELD.  This fund invests in the government debt of 14 Emerging Market countries.  Even better, they break up their investment into tiers based on the credit-quality of each country.  The countries in the top-tier have a higher investment allocation than countries assigned to lower tiers. 

In this recent Morningstar video, Wisdom Tree CEO Jonathan Steinberg explains the benefits of investing in ELD. 




Full Disclosure:  SCIA clients and Randall Reinwasser own ELD.

Emerging Market Debt Gets Respect

Wisdom Tree Emerging Market Debt Fund