Investors often turn to international equities to diversify but many overlook a powerful companion: international fixed income. In this episode of Better Vantage by Vanguard, Dan Shaykevich, Vanguard’s lead portfolio manager for emerging markets debt, makes the case that within that overlooked sector, emerging markets (EM) bonds are not just a “nice to have” but a strategic allocation.
A role for emerging markets debt in your portfolio?
The EM asset class has evolved significantly. Today’s EM debt is more diversified, higher-quality, and less concentrated than in the past, which challenges outdated perceptions of risk. It also offers a compelling mix of income, resilience, and equity-like return potential, making it a possible complement to traditional U.S. bonds and stocks.
One key insight: Currency exposure is not simply a risk—it’s the point. Even U.S.-based spending is influenced by global currency movements, meaning investors may already have hidden exposure. EM bonds, especially local-currency bonds, can provide intentional diversification while generating yield, offering an advantage over other “dollar hedge” options such as commodities or cryptocurrency.
The episode also highlights why active management may be especially valuable in this complex, opportunity-rich market.
Bottom line: EM bonds can help investors diversify more effectively across both assets and currencies.
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Notes:
All investing is subject to risk, including possible loss of principal. Investments in stocks or bonds issues by non-U.S. companies are subject to risks including country/reginal risk and currency risk. These risks are especially high in emerging markets.
Diversification does not ensure a profit or protect against a loss. Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments.
Currency hedging transactions may not perfectly offset a fund’s foreign currency exposures and may eliminate any chance for a fund to benefit from favorable fluctuations in relevant currency exchange rates. Funds incur expenses to hedge currency exposures.
Trading in cryptocurrency ETFs and mutual funds may involve significant risk and may not be suitable for all investors.
Past performance is not a guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
Visit vanguard.com to obtain a Vanguard fund prospectus, or, if available, a summary prospectus, which contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.
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