Although Turkey holds an investment-grade credit rating, the country’s historically fractious relationship with ratings agencies could be further strained in the event of a sovereign downgrade that returns the country to junk status.

Such a move also has the potential to weigh on several exchange traded funds that feature large allocations to Turkish sovereign debt. A downgrade of Turkish sovereign debt also is not a far flung idea in the eyes of PIMCO, the world’s largest bond manager.

PIMCO Portfolio Manager Michael Gomez called Turkey’s monetary policy “unorthodox” in an interview with Isobel Finkel and Onur Ant of Bloomberg, noting that “Following the upgrades to investment grade, substantial funds flowed into Turkey, and there is a risk that these could revert if they are downgraded to sub-investment grade.”

Turkey has a Baa3 rating from Moody’s Investors Service and a BBB- rating from Fitch, near the lowest investment-grade ratings those firms use. Standard & Poor’s rates Turkey’s sovereign debt BB+.

The iShares Emerging Markets High Yield Bond ETF (NYSEArca: EMHY) is one ETF that could be vulnerable to downgrade of Turkish bonds as the $202.2 million ETF features a 13.6% weight to Turkish debt.

EMHY, which has an effective duration of almost 5.8 years and a 30-day SEC yield of nearly 5.9%, is up 6.5% this year, an impressive move considering its exposure to controversy. In addition to the 13.6% weight to Turkey, the ETF has a 14.2% weight to inflation-riddled Venezeula and a combined 14% allocation to Russia, Brazil and Ukraine. [Some Bond ETFs Endure Ukraine Conflict]

Speaking of Ukraine, that country is the only one that has seen its two-year notes surge more than Turkey’s over the past month, according to Bloomberg. Turkish 10-year bonds have climbed more than 50 basis points since June 30.

Another ETF that could be tested by Turkish downgrade is the ProShares Short Term USD Emerging Market Bond ETF (BATS: EMSH). The dollar-denominated EMSH is up modestly this year, no small feat considering its geographic weights are just as controversial as EMHY’s.

EMSH allocates 8.2% of its weight to Turkey, but the hits do not end there. The ETF also features a combined 23% allocation to Russia, Brazil and Ukraine. [Russia ETFs Slide After S&P Downgrade]

EMSH has a 30-day SEC yield of 3.33% and a modified duration of 2.53 years.

Other ETFs could be affected by a downgrade of Turkish government debt because the funds’ underlying indices could expel the country in the event of a downgrade.

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