Vanguard Emerging Markets Government Bond ETF (VWOB)
Dividend Yield (SEC): 4.8%
We’ve pointed out before that emerging-market government debt can be not just a source of high-yield income, but a quality one. Vanguard’s entry into this space is the Vanguard Emerging Markets Government Bond ETF (VWOB).
Unlike the VanEck Vectors Emerging Markets High Yield Bond ETF (HYEM) that we highlighted earlier, VWOB is solely sovereign debt. But that doesn’t make it any less risky. In fact, just about 40% of the fund’s 949 bonds are rated lower than Baa, earning “junk” status. Another 36% of the fund is Baa, which is considered medium-risk. That means just about a quarter of VWOB’s debt is actually considered investment-grade.
That said, don’t fret. Vanguard Emerging Markets Government Bond ETF is diversified across more than 60 emerging- and frontier-market debt. Even its one double-digit weight is in China – not much of a default worry. Meanwhile, Mexico and Brazil each make up more than 7% of the fund, and Russia, Indonesia and Turkey debt each account for more than 5% of VWOB’s weight.
Here, Vanguard hasn’t had as much success.
VWOB Struggles Against Emerging-Market Competitors
The chart above actually has two purposes. For one, I want to show VWOB’s returns, which haven’t been as successful as similar offerings from iShares and PowerShares. The latter’s Emerging Markets Sovereign Debt Portfolio (PCY) is a particularly balanced fund where Venezuela is the top holding at just 4.2% in weight.
But I also want to show you the difference between funds that hold debt denominated in U.S. dollars, and those that hold debt denominated in local currency. The former has been (and will continue to be) more successful in a strong-greenback environment. The latter – funds such as VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (EMLC) and iShares Emerging Markets Local Currency Bond ETF (LEMB) – have struggled, and will continue to be the lesser option as long as the U.S. dollar continues to be the globe’s currency of choice.