As developing nations continue to draw investor attention, opportunities in developing market debt may present a viable opportunity.

To not much surprise, many have been turning to developing nations mainly due to their aggregate, or combined, size and expected exponential growth compared to the United States in the near future.   In fact, a recent study indicates that 97% of the world’s population, 75% of its economic production and nearly 67% of stock market capitalization is outside of the United States.

As for economic growth, developing nations are expected to grow at two to three times the rate of the United States.  Additionally, the Fed’s decisions to keep interest rates at historically low levels to prevent a double dip recession as well as the federal government running record level deficits points to a likelihood in declines of the dollar against other currencies, further adding to the appeal to developing nations.

Emerging market debt has many of the same positive forces as emerging equity, however many suggest that it offers investors the same diversification with less risk.  An additional factor that makes emerging debt attractive is the fact that it is denominated in local currency as opposed to in dollars.  Lastly, emerging market bond funds enable investors to play hard to reach currencies like the Malaysian ringgit or the Philippine peso.

Although the outlook for these markets seems to be bright, it is equally important to keep in mind that these markets could possibly fall as quickly as they rise and that not all sovereign debt is treated equally.  With this in mind, a good way to protect from downside risks is through the use of an exit strategy.

Some ways to gain exposure to emerging market debt through ETFs include:

  • iShares JP Morgan USD Emerging Markets Bond Fund (EMB), which boasts a yield of 5.23% and gives exposure to sovereign debt in Russia, the Philippines and Turkey.
  • PowerShares Emerging Markets Sovereign Debt Fund (PCY), which boasts a yield of 5.97% and gives exposure to Ukraine, Indonesia and Venezuela.
  • WisdomTree Emerging Markets Local Debt (ELD), which boasts a yield of 5.63% and gives exposure to the debt of Chile, Malaysia, Brazil, Peru and Mexico.

Disclosure: No Positions

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