Invesco Emerging Markets Sovereign Debt ETF

PCY

Market cap $1.46B

Investors holding Invesco Emerging Markets Sovereign Debt ETF ( NYSEARCA:PCY ) have seen shares rise 14% over the past year, but the fund has flatlined since early December.

At the same time developed markets have been generating policy and macro noise, emerging markets have been quietly outperforming. The inextricable relationship between the direction of U.S. monetary policy and emerging market risk assets remains powerful, but this time the rally is not just about the Fed.

The Invesco Emerging Markets Sovereign Debt ETF targets higher-yielding sovereign debt from riskier emerging markets like Egypt, Nigeria, and Pakistan. PCY offers a 6.54% current yield and a 10.75-year average duration, with monthly distributions around $0.10 per share. Recent years have seen improved performance and rising institutional interest, though five- and ten-year returns were subpar.

EM bond ETFs like EMB, VWOB, and PCY might draw investor interest as high real yields and a weaker dollar lift emerging markets.

When it comes to equities exposure, U.S. large-caps continue to garner the lion's share of capital allocations. However, emerging markets (EM) could finally be in the throes of a comeback.

PCY consistently underperforms peers across total return, yield, and risk metrics, making it an inferior choice for emerging market bond exposure. Alternative ETFs like EMHY, EMTL, and VCLT offer better returns, higher credit quality, or more attractive duration profiles for various investor strategies. PCY's average expense ratio and high yield do not compensate for its poor historical performance and less favorable portfolio composition.

Lauded for their yield, emerging markets (EM) bonds could be a compelling option even when taking credit risks into account. The macroeconomic environment in particular adds intrigue to funds like the Invesco Emerging Markets Sovereign Debt ETF (PCY).

Amid expectations that the Federal Reserve will reduce interest rates this year — perhaps multiple times, — there's renewed interest in U.S. bonds, both corporate and Treasuries. However, fixed income investors shouldn't take their eye of the international ball.