Emerging markets have been under the spotlight so far this year. One of the primary reasons for growing inflows in emerging markets is the uncertainty of President Trump’s protectionist agenda. Investors are worried regarding the implementation of President Trump’s promised tax cuts and de-regulation, after the healthcare bill failure. The increased political tensions in Washington have led many investors to look out for better returns outside the U.S. (read: Can Emerging Market ETFs Retain Their Mojo in 2017?)

Emerging market (EM) bond ETFs provide great diversification potential as their returns are traditionally not highly correlated to other major asset classes in a portfolio. Investors who are looking to offset the currency risk are likely to consider funds issued in U.S. dollars to hedge away the currency risk.

What’s in Favor of Emerging Markets?

Less Hawkish Outlook of the Fed

The Federal Reserve had a relatively dovish stance in its March 2017 meeting. Analysts had priced in three rate hikes this year. However, the Fed indicated a rather slow path toward rate hikes. Moreover, a plan in progress to shrink its $4.5 trillion balance sheet speaks in favor of reduced speed of rate hikes. Therefore, lower rates should push investors towards Emerging markets (read: Dollar Denominated EM Bond ETFs: A Good Play for 2017?).

Rising Commodity Prices

Many emerging markets are commodity centric. Oil prices picked up post the OPEC deal. Even though prices saw a slight downturn due to increased U.S. shale production, these are expected to stabilize with production cuts.

Growth Potential

Emerging markets have shown tremendous potential so far this year. With China’s GDP growing at 6.9% in the first quarter of 2017, a major state election victory for the ruling party in India, and Brazil and Russia emerging out of recession, there is increased confidence that emerging nations will offer higher growth than their developed counterparts.

Downsides