Emerging Markets: current status and diversification opportunities for a Bond Portfolio

Abstract

How good are the opportunities offered by the Emerging Markets in the Bond sector? If an investor is willing to exploit the ETFs in the short medium term as a good representative of these markets which scenarios should he prospect? This paper aims to present the current status of how is possible to diversify a bond portfolio in the developing economies, which results could have historically been achieved in the last four years and which is the current development status of the ETFs in those economies. The First chapter will introduce the harshly debated concept of emerging market economy with a focus on what is commonly accepted for the definition and the main risks and characteristics that associate them. It is followed by a chapter examining the Bond Indexes. After an introduction about how they are built and structured, the focus will be set on the status of the emerging market indexes: how they describe the market and which indexes are now available? This will lead the discussion to the ETFs. A detailed explanation of the potentiality of this investment vehicle will clarify the reason behind is huge diffusion since his creation, 25 years ago. But even if ETFs are still increasing with impressive rates in all the strongest market worldwide, what is the current situation in the less developed countries? How many ETFs are replicating their Bond Indexes? Given a retail investor willing to diversify in the emerging market economies, which options could have taken in account in the last four years? What would they have led to? The following two chapters will focus on the optimization method that he could have used and on the analysis of differently combined portfolios. What are the opportunities and the results of this 4 years’ strategy? Did he make a good choice in this diversification or the bond market in the emerging economies is not attractive as expected? Given the analysis performed, the last chapter will conclude this paper with a comparison between two different points of view in investment strategy: diversification and concentration. How can they coexist and when one should be preferable to the other?