In the search for income, investors may want to look outside the United States. Vanguard’s Emerging Markets Bond fund (VEMBX) is a “hidden gem” and Vanguard’s best foreign bond fund, according to Jeff DeMaso, founder and editor of the newsletter ” The Independent Vanguard Adviser .” It has a 7.39% 30-day SEC yield, according to Morningstar . The fund has also earned a five-star rating from Morningstar. “It’s a well-run emerging markets bond fund that has topped its index (and the Morningstar peer group),” DeMaso said. The actively managed fund was up 43% from April 2016 through May 2023, compared with an 11% return for Vanguard’s Emerging Markets Government Bond Index Fund (VGAVX) during the same time frame, according to DeMaso’s calculations. The VGAVX seeks to track the performance of the Bloomberg USD Emerging Markets Government RIC Capped Index. So far this year, the VEMBX has a total return of 5.14%, versus the 3.84% total return of its Morningstar category. Its holdings include debt from Peru, Saudi Arabia and Colombia. Not only does VEMBX fly under the radar, but it has a stellar portfolio manager in Daniel Shaykevich, DeMaso said. Shaykevich, who is the firm’s co-head of emerging markets and sovereign debt team, came to Vanguard in 2013 after spending 11 years at BlackRock. He spent the majority of his time at BlackRock managing global emerging market debt portfolios. “Shaykevich may be one of the best emerging market bond managers no one has ever heard of,” DeMaso said. Shaykevich said he believes emerging markets external debt can add value to any credit portfolio. Not only does it have a long history of strong risk-adjusted returns, emerging markets debt is significantly more diversified than it’s ever been, Shaykevich said. The segment includes wealthy oil exports from the Persian Gulf and low-income countries in sub-Saharan Africa, he noted. “Each position and risk factor exposure are sized in the portfolio based not on how much we might gain, but how much we could lose if we get it wrong,” Shaykevich said. The outperformance is driven by a blend of country allocation, security selection and measure exposure to macro-economic drivers, he added. “We believe that enables us to generate alpha in a more repeatable, more diversified way over a market cycle,” he said.