Imagine you are at a Super Bowl party today, and someone asks you to lend them money. Here’s their pitch - “I spend way more than I make and plan to do that indefinitely, I already have a huge amount of debt relative to my income, and I don’t plan on paying you much interest for the loan.” I suspect you would pass on the “opportunity.” And yet…when most investors are building their bond allocation they gobble up that pitch like it was a seven-layer dip. It’s the pitch you are getting from most developed-market countries.

Meanwhile, many emerging countries have much better pitches - smaller fiscal deficits, less outstanding debt, and trade surpluses. No country is without warts, but in many cases in the EM you are at least being compensated for some warts through higher real interest rates. In part for those reasons, we have been structurally overweight emerging-market bonds versus developed-market bonds since our inception, and probably will be for a long time.

The chart below shows the cumulative total returns of three common bond ETFs over the last five years. It hasn’t been a great environment for bonds, so none of the returns have been worthy of writing home. But assuming you care about diversification and therefore want to always own some bonds, the relative returns have been stark.

The beauty of investing globally is that you can hunt down the best deals, no matter where they are domiciled. That’s true for stocks, and it is true for bonds. And in the case of bonds, we think it is clear that the best opportunities live in the emerging world.