As Emerging Markets Look to Stifle Inflation, Consider ‘VWOB’

Many overseas governments are taking swift action to stifle inflation, which bodes well for EM bonds and assets like the Vanguard Emerging Markets Government Bond Index Fund ETF Shares (VWOB).

One country exhibiting considerable opportunity is Brazil, to which VWOB offers a 4.9% market allocation, as of 5/31/21.

“Global bond investors are on the prowl for emerging markets that are ahead of the game on inflation,” a Bloomberg article said. “TS Lombard recommends funds buy local debt from Brazil, where a third interest-rate hike is expected when officials meet Wednesday. PineBridge Investments praised inflation tough talk from Bank of Russia Governor Elvira Nabiullina and predicted gains for the nation’s longer-maturity bonds.”

VWOB seeks to track the performance of a benchmark index that measures the investment return of U.S. dollar-denominated bonds issued by governments and government-related issuers in emerging market countries. The fund employs an indexing investment approach designed to track the performance of the Bloomberg Barclays USD Emerging Markets Government RIC Capped Index.

All of the fund’s investments will be selected through the sampling process, and under normal circumstances at least 80% of the fund’s assets will be invested in bonds included in the index. The fund comes with a 0.28% expense ratio.

Ratcheting Down Monetary Policy

Per the Bloomberg article, “central bankers in the developing world are treading a fine line managing price pressures in places where the scars of hyperinflation are fresh and also nurturing economies still struggling with the coronavirus pandemic.”

Countries keeping one step ahead of inflation will be likely to receive the most attention from investors.

“Investors will ultimately favor those countries in which central banks are able to get ahead of inflation,” said Jon Harrison, the London-based managing director for emerging-market macro strategy at TS Lombard. “It’s essential that central banks react pro-actively.”

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