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.”
Gramatovich also notes that Venezuelan oil reservoirs are among the more technically challenging. California-based Peritus is the sub-advisor for the AdvisorShares Peritus High Yield ETF (NYSEArca: HYLD). The ETF has no exposure to Venezuelan bonds. [Warnings for ETFs With High-Yield Energy Exposure]
An almost 7% weight to Venezuela has sent the Market Vectors Emerging Markets High Yield Bond ETF (NYSEArca: HYEM) down 2.8% since Sept. 8, but the bulk of that ETF’s weight is allocated to far sturdier countries such as China, Mexico and Colombia, all of which have investment-grade ratings and none of which are near default. Those countries combine for 21% of HYEM’s weight. [Portfolio Diversity With EM Bond ETFs]
HYEM has a 30-day SEC yield of 7.61% and an effective duration of 3.97 years. The ETF’s overall country lineup implies a Venezuela-induced retreat might be overdone, but investors should still tread carefully with Venezuelan debt, particularly if oil prices keep falling.
“The Chinese have provided some capital (to Venezuela’s oil industry), but it is not enough,” said Gramatovich. “I don’t know their contractual pricing arrangements, but given their recent reactions, it appears they’re in full panic mode.”
iShares Emerging Markets High Yield Bond ETF
