State Street DoubleLine Emerging Markets Fixed Income ETF (EMTL)

The State Street DoubleLine Emerging Markets Fixed Income ETF (EMTL) invests in bonds issued by governments and companies in emerging markets — countries whose economies are still developing and whose debt typically offers higher interest payments than US Treasury bonds or European government bonds. The fund’s active managers select which bonds to buy, trying to balance yield (the interest payment) against credit risk (the chance the borrower will not pay back) and currency risk (changes in exchange rates).

Why emerging-market bonds pay more

A government bond issued by the United States pays a low interest rate because the US is deemed extremely safe — backed by a large economy, a stable legal system, and the ability to print its own currency. Brazil or Mexico, by contrast, is riskier. Its currency might weaken. Its government might face economic crisis. So when Mexico or Brazil borrows money by issuing bonds, investors demand a higher interest rate to compensate for that risk. The difference between what a country pays and what the US pays is called the “spread,” and it reflects the market’s assessment of relative risk.

Emerging-market bonds also offer credit risk that developed-market bonds do not. A corporate bond issued by a Brazilian bank is riskier than a bond issued by a US bank because the Brazilian bank operates in a less-stable economy and may be exposed to currency depreciation or sudden government policy changes. So it pays a higher rate.

For investors seeking higher income, emerging-market bonds are appealing. The yield advantage can be substantial in absolute terms, and it can boost total returns if the borrowed is sound and does not default. EMTL aims to capture this extra yield while managing the risks through active research and selection.

DoubleLine’s strategy and approach

DoubleLine Capital, the sub-adviser, is a fixed-income specialist founded by Jeffrey Gundlach. The firm is known for fundamental credit research — deep analysis of government finances, corporate earnings, and macroeconomic trends. DoubleLine’s thesis in emerging-market bonds is straightforward: many emerging markets offer attractive yields because they are feared, not because they are actually unsafe. By studying the fundamentals carefully, the team can identify bonds that are mispriced — offering high yield but carrying reasonable underlying risk.

The fund holds bonds from a mix of countries: Mexico, Brazil, India, South Africa, the Philippines, Turkey, and others. It holds both government bonds (sovereign debt) and corporate bonds. Government bonds offer government backing but also carry political and currency risks. Corporate bonds offer the ability to pick individual companies or sectors, but they layer company-specific risk on top of country risk.

The income stream and the yield trade-off

The fund generates income by collecting interest (coupon) payments from the bonds it holds and passing them along to shareholders as distributions. If the fund holds a bond paying 7% and the fund’s expenses are low, shareholders might receive a distribution of 6.5% or so annually. This is much higher than a US Treasury yielding 3–4%, so EMTL appeals to income-seeking investors.

But higher yield comes with higher risk. If a country enters a recession or a company defaults on its bond, the bond’s value drops. The fund’s price per share will decline. An investor who bought EMTL for the yield but then saw it drop 10% would not be happy, even if the income distributions continued.

This tension is core to emerging-market fixed income: the investor is getting paid extra to take on extra risk, and there is no free lunch. In some years and environments, taking that risk pays off. In others — when emerging markets face sudden crises, currency collapses, or contagion from developed-market shocks — the risk materializes and returns turn negative despite the high yield.

Currency risk and hedging decisions

Many of the bonds EMTL holds are denominated in emerging-market currencies — Brazilian real, Mexican peso, Indian rupee, Philippine peso, and others. When the fund holds a bond paying interest in pesos, it earns that interest in pesos, but when it distributes the income to a US-based shareholder, the pesos must be converted to dollars. If the peso weakens against the dollar, the dollar value of the interest payment is smaller.

DoubleLine can choose to hedge this currency risk using forwards or other derivatives, converting foreign-currency interest payments back to dollars at a locked-in rate. Hedging reduces the uncertainty of returns but costs money — the cost of the hedge is deducted from the fund’s income. Unhedged funds offer higher yield but expose shareholders to currency swings. EMTL typically operates partially hedged, seeking a balance.

Interest rate and credit cycles

The fund faces classic fixed-income risks: interest-rate risk and credit risk. Interest-rate risk means that if US interest rates rise, existing bonds that pay lower rates become less attractive, and the fund’s price falls. Because emerging-market bonds have high yields, they are actually more sensitive to US interest-rate moves than one might expect.

Credit risk is the risk that a bond issuer — a government or company — cannot pay back the principal or interest. This is a real concern in emerging markets, where economic downturns are sharper and more frequent than in developed markets. The fund relies on DoubleLine’s research to avoid the worst credit risks, but they cannot eliminate the risk altogether.

The active-management advantage (or lack thereof)

EMTL is actively managed, meaning DoubleLine’s team is picking individual bonds rather than tracking an index. This costs more than a passive index fund. The question is whether the team’s research and selection skill justify the fee. Some of DoubleLine’s fixed-income strategies have delivered strong returns over long periods, but emerging-market fixed income is inherently difficult. Economic surprises are common, defaults can be sudden, and currency moves are hard to predict. There is no guarantee that active management will outperform a simple emerging-market bond index after fees.

Portfolio construction and diversification

The fund typically holds 150–250 individual bonds across multiple countries, sectors, and credit qualities. This breadth provides diversification — no single country or issuer dominates, so a problem in one area does not sink the entire fund. Within countries, the fund varies its allocation based on DoubleLine’s view of that country’s macroeconomic prospects, inflation, currency trajectory, and fiscal health.

The fund also manages the mix of government and corporate bonds. Government bonds offer country exposure and are usually the largest and most liquid part of an emerging market’s bond market. Corporate bonds offer company-specific return potential but require more credit analysis. A balanced allocation might be 60–70% government bonds and 30–40% corporate, though this shifts with market conditions and the team’s outlook.

Real risks and structural vulnerabilities

Emerging-market fixed income is vulnerable to sudden reversals of capital flows. When global risk appetite declines, investors simultaneously reduce their emerging-market bond holdings, driving prices down and yields up (prices and yields move inversely). This can happen suddenly and sharply, as happened in 2008, 2018, and 2020 during various crises. A fund holding many emerging-market bonds experiences sharp declines in value during these episodes, even if the underlying bonds are fundamentally sound.

Currency crises are also possible. If a country’s currency collapses, a bond denominated in that currency becomes worth much less in dollar terms. The government might default or restructure the debt. These are tail risks — they do not happen every year, but they can be severe when they occur.

How to research EMTL

Start with the fund’s prospectus and fact sheet, which detail the geographic and credit quality breakdown of holdings. Check the current yield, the expense ratio, and the weighted average maturity (how long until the bonds mature). Compare EMTL’s yield and returns against other emerging-market bond funds and against an emerging-market bond index to assess whether the active management is adding value.

Monitor DoubleLine’s commentary on emerging-market risks and macroeconomic outlook. Watch for changes in US interest rates, as these directly affect the fund’s performance. Track emerging-market currency trends and central-bank actions in major countries the fund holds. Finally, be aware that the fund distributes income regularly — understand the tax implications of those distributions if you hold the fund in a taxable account.