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Fund Spy

Choose Your Own Emerging-Markets Bond Adventure

This growing category contains few one-size-fits-all options.

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Welcome to the bandwagon. Assets in open-end and exchange-traded emerging-markets bond funds have more than quadrupled from the start of 2010, ballooning to $95 billion in assets as of February 2013 from nearly $20 billion. That interest has spurred fund companies to launch a wide variety of new strategies; the number of open-end funds has risen to 75 from 28 in just three years.

Most of the older funds in that group focus mainly on hard-currency sovereign or quasi-sovereign bonds, those issued in dollars rather than the currency of their country of origin. Historically, dollar-denominated issuance made up the preponderance of these funds' investment universe, as this was the only viable way for countries with dicey fundamentals to gain access to capital. That dynamic has shifted over the past several years, after many maturing emerging markets have cleaned up their finances and have continued to exercise prudent fiscal and monetary policy. That has led to the development of robust domestic bond markets in many countries. In fact, local-currency markets' share of the entire emerging-markets fixed-income universe now tops 80%. Meanwhile, in the dollar-denominated market, emerging-markets corporate bonds have taken up an ever-greater share of new issuance, between 60% and 80% in each year since the global financial crisis.

Miriam Sjoblom does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.