Neuberger Emerging Markets Debt Hard Currency ETF (NEMD)

The Neuberger Emerging Markets Debt Hard Currency ETF (NEMD) holds bonds issued by or on behalf of emerging-market governments and corporations, but only those denominated in stable developed-world currencies, primarily the US dollar.

The Neuberger Berman lineage and fixed-income discipline

Neuberger Berman is a longstanding independent asset manager founded in 1939, with deep roots in institutional fixed-income management. The firm has spent decades analyzing credit risks in markets both developed and frontier, building proprietary databases and relationships. NEMD reflects that expertise: the fund’s emerging-market bond holdings are selected and weighted according to Neuberger’s credit research and relative-value judgments rather than following a mechanical index. The manager has the discretion to overweight names it views as undervalued and underweight others, within the constraint that all holdings must be hard-currency denominated.

That active approach sets NEMD apart from purely passive emerging-market bond funds. The fee reflects it — investors pay for research and security selection that a simple index tracker would not provide.

Why hard currency matters: the currency hedge without the hedge

An emerging-market bond issued in the country’s local currency — say, a Brazilian bond in Brazilian reals — carries two risks: credit risk (will the issuer pay back the principal and interest?) and currency risk (what will those real payments be worth in dollars if the real depreciates?). Investors in the United States who care mainly about dollar returns face both headwinds simultaneously. If Brazil’s credit outlook deteriorates, the bond price falls. If the real then weakens against the dollar, it falls again.

Hard-currency bonds — those issued in dollars, euros, or other developed-world currencies — sidestep the currency problem. A bond issued by the Brazilian government but denominated in US dollars eliminates the translation risk. Brazil still bears the credit risk, and holders still suffer if Brazil’s finances deteriorate, but there is no additional currency loss if the real falls. For a US investor, NEMD’s holdings are priced and paid in dollars, so there is no need to worry about forex swings.

The trade-off is yield. A hard-currency emerging-market bond typically pays less interest than an equivalent local-currency bond would, because investors are paying a premium for the convenience of receiving dollars. A Brazilian real-denominated bond might yield 8 per cent; the same issuer’s dollar bond might yield 5 per cent. The 3 per cent difference is the price of currency safety. Whether that trade is worth it depends on your currency outlook and your risk tolerance.

From the 1990s boom to modern emerging markets

Emerging-market bonds in hard currencies became a systematic asset class in the 1990s and 2000s, as developing countries learned to issue dollar-denominated debt to international investors and as international investors learned they could access meaningful yields without taking full currency risk. Mexico, Brazil, Russia, and later China and India became regular issuers. Neuberger Berman and other institutional managers began building dedicated teams to analyze the credits and construct portfolios.

The 2008 financial crisis tested the asset class harshly. US investors who had loaded up on emerging-market debt found themselves locked in as credit spreads blew out (bonds became less valuable) and currency risk re-emerged because many developing countries’ central banks intervened in forex markets. Defaults were avoided in most cases, but the experience made clear that “hard currency” does not mean “no risk” — it means one less risk, not zero risk.

Over the subsequent years, the emerging-market bond ecosystem matured. Issuers became more disciplined about debt levels, swap markets deepened, and investor bases diversified. Neuberger Berman and its competitors built larger, more sophisticated models to assess the credits and identify relative value. NEMD, whether launched recently or refined over time, benefits from that institutional knowledge.

The portfolio today: spread hunting in a fragmented world

NEMD’s current portfolio likely includes a mix of sovereigns (government bonds) and corporate issuers from across emerging markets. Sovereigns tend to be the core — Mexico, Brazil, Colombia, and other countries that regularly access dollar debt markets. Corporations might include telecoms, banks, and utilities from emerging markets that need to fund operations or refinance existing debt. The manager picks and weights based on credit quality, yield, and the relative value of each security against alternatives.

In an environment of low global interest rates, the yield advantage of emerging-market bonds in hard currency is smaller than in the 1990s or early 2000s, when the spread (the extra yield above US Treasuries) was often much wider. Today, an emerging-market corporate dollar bond might yield 3 or 4 per cent over US Treasuries; two decades ago it might have been 6 or 7 per cent. That tighter spread reflects both the risk-on appetite of international investors and the structural improvements in emerging economies themselves.

Risks: credit, liquidity, and the concentration trade

The core credit risk is that a borrower — a government or corporation in an emerging economy — fails to pay. Emerging markets face higher risks of political instability, currency crises, and sudden reversals than developed economies. A country’s ability to service dollar debt depends on its forex reserves, its export earnings, and its domestic political willingness to prioritize debt service. A company faces the same credit risks as any other, but with the additional layer of country risk.

Liquidity can also be an issue. While the largest emerging-market issuers have active trading markets, smaller names can be illiquid — the bid-ask spread widens and you may struggle to exit a position quickly. NEMD, being a large fund with substantial assets, likely has broad enough holdings that liquidity is manageable, but individual positions could be thin.

The exposure to emerging markets is itself concentrated geographically and sectorally — the portfolio does not span all countries or all industries. That concentration is the fund’s bet: Neuberger believes certain credits are attractive relative to others. If those credits soar, the fund benefits; if they fall out of favour, NEMD underperforms.

How the fund fits into a portfolio and how to research it

NEMD is typically a satellite holding for income-seeking investors who want some exposure to emerging-market credit and are willing to accept the associated risks in exchange for yields higher than developed-market bonds. It is not a core bond holding for conservative portfolios; it is more suitable for sophisticated investors with high risk tolerance.

Read the fund’s fact sheet and prospectus to see the top holdings, the country and sector breakdown, and the average yield. Compare NEMD’s yields and credit quality against competing emerging-market bond funds, both active and passive. Check the fund’s track record — if available — against a passive emerging-market hard-currency bond index to see whether Neuberger’s active management has added value. Understand the composition of the fund: if 40 per cent is concentrated in two countries, ask yourself whether you are comfortable with that concentration. Finally, run a simple stress test: if all emerging markets experience a credit downgrade and spreads widen by 200 basis points, how much would NEMD lose? That scenario is unlikely but not impossible, and the answer tells you whether the risk is proportionate to your portfolio and goals.