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Combing Through the Emerging-Markets Debt Category

Ample in variety and in new offerings.

Nearly half of emerging-markets debt funds are less than three years old, bringing the total of open-end and exchange-traded offerings to around 110 today. Given this, investors are faced with a lot of unproven choices. They also have many different approaches to consider as the makeup of the emerging-markets debt universe has changed over the past decade. Today this group contains four approaches that come with varying levels of credit, interest rate, and currency risk.

The Clearest Distinction: Hard vs. Local Currency
Most of the group's oldest funds were launched in the 1990s and focus on emerging-markets debt denominated in U.S. dollars. These are referred to as hard-currency or external-currency funds and currently represent about one fifth of the category. While investors aren't exposed to the currency risks of the underlying issuers, they are taking on credit risk stemming from political, regulatory, or market developments. A commonly used benchmark for such funds is the JPMorgan Emerging Market Bond Index Global, or EMBIG, which contains roughly 60 sovereign credits. That includes many lower-rated countries such as Venezuela, Ukraine, Hungary, and Argentina. Many of the index constituents are export-dependent nations that can be vulnerable in global economic slowdowns.

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