S&P’s Venezuela Downgrade Puts Focus on These ETFs

December 15th at 7:30am by Tom Lydon

Venezuela, South America’s largest oil producer, saw its sovereign credit rating sink further into junk status Friday when Standard & Poor’s lowered its rating on the country to B- from B.

That downgrade comes after S&P lowered its rating on the OPEC member to B from B+ in June. S&P concerned regarding the “growing radicalization of economic policy” in Venezuela in just the past 60 days. Venezuela, which is ruled by a military-style dictatorship, is home to dwindling foreign currency reserves and some of the worst inflation in the emerging world.

To combat that inflation, the government has enacted harsh price controls, is seizing stores and jailing businessmen, according to the Financial Times.

Although no U.S. exchange traded funds hold Venezuelan equities, there are a few that offer exposure to the country’s bonds, including the iShares Emerging Markets High Yield Bond ETF (NYSEArca: EMHY). Like many emerging markets bonds ETFs, EMHY has been beaten up this year (it is down 11.6%) and its controversial country mix explains why.

Turkey, Venezuela and Indonesia combine for 40% of the EMHY’s weight. EMHY, which carries a 30-day SEC yield of 6.73%, has steadied a bit in recent months, posting small gains over the trailing 30- and 90-day periods. [10 Bond ETFs With Yields Above 5%]

Although the results of recent municipal elections in Venezuela apparently emboldened the government’s interventionist streak, that may not be all bad for bonds there. On Monday, JPMorgan raised its recommendation on Venezuelan bonds to “tactical overweight” from neutral while noting that diminished political uncertainty and the lack of elections next year open a window for economic adjustments including devaluation of the bolivar, reports Nathan Crooks for Bloomberg.

The Arrow Dow Jones Global Yield ETF (NYSEArca: GYLD) is another ETF with exposure to Venezuelan debt at both the sovereign and quasi-sovereign levels.

GYLD has exposure to other developing markets as well, but most of the fund’s weight is allocated to developed markets and that has helped the fund perform admirably among global bond ETFs this year. Global corporates and sovereigns combine for 40.3% of GYLD’s weight. The fund has a 30-day SEC yield of 6%. [A Global Multi-Asset ETF With a Juicy Yield]

The Market Vectors Emerging Markets High Yield Bond ETF (NYSEArca: HYEM), with a 30-day SEC yield of 7%, has a 5.7% weight to Venezuela.

Arrow Dow Jones Global Yield ETF

ETF Trends editorial team contributed to this post.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.