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

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.