One Country EM Bond ETF Investors Need to Watch

Sure, Brazil saw its sovereign debt rating reduced to the lowest investment grade by Standard & Poor’s earlier this year and Turkey has had long-standing acrimony with various ratings agencies.

And yes, Russia’s sovereign credit rating has been lowered not once, but twice this year. Even with all that, the country that investors in some exchange traded funds holding developing world sovereign debt should closely monitor is Venezuela. [EM Bond ETFs Confront Another Russia Downgrade]

There is not a Venezuela-specific ETF on the market today, which in the eyes of some short sellers is probably too bad given the recent plunges by ETFs that track other Organization of Petroleum Exporters (OPEC) member states. [OPEC ETFs Get Crushed]

Venezuela does, however, figure prominently in some emerging markets bond ETFs, including the iShares Emerging Markets High Yield Bond ETF (NYSEArca: EMHY). The $200.1 million EMHY allocates almost 11% of its weight to Venezuelan debt, a notable amount when the oil-rich South American nation is inching towards default.

Yields on two Venezuelan bonds reside near 27%. With inflation topping 60%, the cost of credit default swaps that traders would use to insure against default on Venezuelan five-year bonds is now above that of any other country, according to the Financial Times.

On September 8, Harvard economist Ricardo Hausmann suggested Venezuela is inching towards sovereign default. Since then EMHY has lost 2.4%. The ETF has a 30-day SEC yield of 6.53%

“Venezuela is imploding. Of course, most people know about this and recognize the country is short of food and medicine,” said said Peritus Asset Management Chief Investment Officer Tim Gramatovich in an email to ETF Trends. “What isn’t as well known is that Venezuela has lost all of its technical talent. So while they have a large reserve base of heavy oil, they have nobody left to produce it.”