Among the best-performing asset classes of recent years, emerging-market debt funds have averaged double-digit annualized returns over the past six years, according to mutual fund researcher Morningstar. Emerging-market debt is the senior security in a developing country. The safest thing you can own in a country such as Mexico, for example, is a Mexican government bond.
The emerging-debt market was rocked in 1998, when Russia defaulted on about $40 billion worth of debt. Since then, emerging markets have made great progress in public finance and structural reforms. Ratings on a lot of these markets have been improved, with more than 20 emerging-market debt upgrades in the past 18 months.
Among leading funds are T. Rowe Price Emerging Market Bond Fund, PIMCO Emerging Market Bond Fund, and Fidelity New Markets Income Fund. Such funds have consistently outperformed international income funds in recent years, mostly because economies are getting better in developing countries.
Also, investors pick up more diversification
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with emerging-market debt funds, which aren’t as correlated to U.S.-based bond funds. Yields are higher, too: Morningstar puts the average yield from funds in this category at 6 percent, nearly twice the yield of domestic bond funds.