First Trust Emerging Markets Local Currency Bond ETF (FEMB) seeks to track an index of government and corporate bonds issued by emerging market countries in their local currencies. This fixed income ETF provides exposure to debt securities from developing nations like Brazil, Mexico, and South Africa without currency hedging to the U.S. dollar.
How It Works
FEMB uses a passively managed approach that tracks a market-value weighted index of emerging market local currency bonds. The fund holds government and investment-grade corporate bonds with varying maturities, typically ranging from 1-30 years. Portfolio composition includes bonds from approximately 15-20 emerging market countries, with rebalancing occurring monthly to maintain index alignment. Currency exposure remains unhedged, meaning returns fluctuate with local currency movements against the dollar.
Key Features
- Provides direct exposure to emerging market local currencies, potentially benefiting from dollar weakness or EM currency appreciation
- Offers attractive 4.74% dividend yield from higher-yielding emerging market bonds compared to developed market alternatives
- Diversifies across multiple emerging market countries and currencies, reducing single-country concentration risk
Risks
- This ETF can lose significant value when emerging market currencies weaken against the dollar, potentially erasing bond gains entirely
- Political instability, economic crises, or policy changes in emerging markets can cause sharp declines in both bond prices and currencies
- Interest rate changes in the U.S. can trigger capital flight from emerging markets, causing simultaneous bond and currency losses
Who Should Own This
Best suited as a satellite holding (5-15% of fixed income allocation) for experienced investors with high risk tolerance and 3+ year time horizons. Appropriate for those seeking emerging market exposure and higher yields while accepting significant currency volatility. Works well for diversifying developed market bond portfolios during dollar weakness periods.