Characteristics of Emerging Market Bond Mutual Funds (EMBF)

Document Type

Article

Publication Date

3-1-2025

School

Finance

Abstract

Emerging-market bond funds (EMBF) invest in emerging-market government and company bonds. Emerging market bonds have higher credit risk than developed market bonds, so they must pay higher interest as compensation for the extra risk. EMBF also can help investors diversify, as they may have a different interest rate cycle than US and developed country bonds. We evaluate the absolute- and risk-adjusted performance of US-based EMBFs from January 1993 to August 2023 and compare them to several different bond sectors and emerging market stocks. Our results indicate that EMBFs have lower risk-adjusted performance than other asset classes, such as US investment-grade, high-yield, and emerging market bonds. However, EMBFs outperformed world government bonds and emerging market stocks. EMBFs also had higher cumulative returns and generated more wealth than all other asset classes except for the emerging market bond index. The five-factor net alpha for EMBF was negative but not statistically significant. However, the five-factor gross alpha was positive and statistically significant. These results indicate that EMBFs are successful in security selection but charge fees that are too high to deliver outperformance.

Publication Title

Journal of Wealth Management

Volume

27

Issue

4

First Page

10

Last Page

19

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