With interest rates continuing to fall, it has become increasingly difficult to generate a decent income through investing. Is the iShares J.P. Morgan USD Emerging Markets Bond ETF (ASX: IHEB) worth the risk?
Exchange-traded funds, or ETFs, are investment funds that are listed on a securities exchange and provide exposure to a range of shares or assets with a single purchase. ETFs can be ‘managed funds’ or ‘index funds’, or in other words, active or passive.
The Rask Finance video below explains ETFs in more detail:
About The iShares Emerging Markets Bond ETF
The IHEB ETF aims to track the performance of the J.P. Morgan EMBI Global Core Index (AUD Hedged) by investing in US dollar denominated emerging market bonds issued by sovereign or quasi-sovereign entities.
The iShares Emerging Markets Bond ETF holds almost 500 bonds spanning a wide range of countries. The largest allocation to any one country is only 5.36%, that being to Mexico, while the next biggest weighting is to Indonesia at 4.88%.
Other countries the IHEB ETF is exposed to include Saudi Arabia, Russia, Qatar, Turkey and the Philippines. Roughly 56.4% of the bonds have a BBB-rating or higher, meaning they are investment grade, while nearly 43% are rated below BBB. The remaining ~0.6% of bonds are unrated.
Most of the bonds are long-term, with an average maturity of 12.59 years.
In terms of performance, the IHEB ETF has returned 3.71% per year over the last three years, while the last 12 months have been particularly strong with a return of 10.23%. The 12-month trailing yield is 4.33%.
Fees & Risks
The IHEB ETF charges a management fee of 0.51%, which is on the higher side for a passive ETF. However, the ETF is currency-hedged to Australian dollars and maintains a global focus.
This is a very high-risk investment, especially given how many of the bonds are below investment grade. Diversification reduces this risk somewhat, however, nearly half the portfolio is still extremely risky.
With investments spread across so many different countries, there are many different interest rates that could change and impact the value of the underlying holdings. The IHEB ETF is certainly not an investment to make lightly.
Although I could see some investors making use of this ETF, there are simply better alternatives for most risk-averse investors. There are plenty of bond ETFs with higher credit ratings that are still offering reasonable yields, for example the Vanguard Australian Fixed Interest Index ETF (ASX: VAF) and the Russell Investments Australian Select Corporate Bond ETF (ASX: RCB).
While it might be tempting to try something different in today’s low-rate environment, I believe it is still so important to stick to what you know.
So, I’d rather invest in our number one ETF pick in the free report below.
Disclosure: At the time of writing, Max has no financial interest in any of the companies mentioned.