What Are the JP Morgan EMBI, EMBI+ and EMBIG Indexes?
3 Important Emerging Market Bond Indexes to Know
Equity and bond indexes are commonly used as performance benchmarks and as a basis for exchange-traded funds (ETFs) and indexed mutual funds. Often times, indexes are broken down into different categories based on their desired exposure, such as European indexes, small-cap indexes, or emerging market indexes.
The J.P. Morgan EMBI (Emerging Market Bond Index), EMBI+ (Emerging Market Bonds Index Plus) and EMBIG (Emerging Market Bond Index Global) indexes are designed to help individual and institutional investors benchmark bond performance in emerging markets around the world, with each index covering different types of emerging market economies.
Emerging Market Bonds
J.P. Morgan’s initial EMBI was launched in 1992 covering so-called Brady bonds, which are dollar-denominated bonds issued primarily by Latin American countries, but was later expanded to also include dollar-denominated loans and Eurobonds. The principal and interest payments on these bonds are made in U.S. dollars rather than a foreign currency, which eliminates currency risks for bondholders.
The EMBI+ was subsequently introduced to also track total returns for external debt instruments in emerging markets around the world.
Shortly after, the EMBIG was launched as the final emerging market bond index introduced as an expanded version of the EMBI+, covering more eligible instruments than the EMBI+ by using less strict limits on secondary market trading liquidity. Most large emerging market bond funds now use the EMBIG index as their benchmark when comparing their performance relative to the market.
Emerging Market Benchmarks
Most investors use benchmarks when comparing actively managed or passively selective exchange-traded funds or mutual funds with their index peers. For example, an investor considering an emerging markets bond ETF may compare its performance to the EMBIG or other J.P. Morgan indexes in order to determine how closely the ETF matches the performance of the indexes.
Some popular emerging market bond ETFs include:
- iShares JP Morgan Emerging Market Bond Fund (EMB)
- PowerShares Emerging Market Sovereign Debt Fund (PCY)
- MarketVectors Emerging Markets Local Currency Bond Fund (EMLC)
- WisdomTree Emerging Markets Local Debt Fund (ELD)
The largest emerging markets bond ETF, the iShares JP Morgan Emerging Market Bond Fund (EMB), uses the J.P. Morgan EMBI Global Core Index as its benchmark, which means that the fund’s managers try to replicate the performance of that index as closely as possible. Other funds, like the PowerShares Emerging Market Sovereign Debt Fund (PCY) use the same underlying index.
Investors have many different options when selecting emerging market bond indexes. While the J.P. Morgan EMBI, EMBI+, and EMBIG indexes may be the most popular, others can offer different characteristics that may be attractive to investors in various situations. For example, some indexes may be customized in order to enhance performance relative to the aforementioned J.P. Morgan benchmarks.
Some other popular indexes include:
- DB Emerging Market USD Liquid Balanced Index
- Bloomberg USD Emerging Market Sovereign Bond Index
- Barclays USD Emerging Market GovRIC Cap Index
Different ETFs and mutual funds utilize different benchmark indexes in order to set themselves apart from the competition and potentially enhance risk-adjusted returns. For example, some funds may focus on narrower definitions of emerging markets while others may be more all-encompassing.
Tips for Investors
The key for investors is determining whether the benchmark index contains all of the components that they’d like to gain exposure to, as well as determine if the level of risk is acceptable for their portfolios. For example, an investor might be looking for exposure to only Latin American USD bonds, but some indexes may have broader exposure that extends into Asia.
In addition to the underlying index, investors should be sure that the actual funds that they're purchasing are appropriate for their portfolio.
The EMBIG index has become so popular that many of the largest and most liquid ETFs and mutual funds use it as a basis, which means that choosing a less popular index's funds could lead to higher liquidity risk and potentially higher fees.
Finally, investors must look at how emerging market bond indexes fit into their overall portfolio. Older investors may want lower exposure to these bonds than younger investors that have a longer time horizon due to their higher volatility than U.S. or developed market bonds.