As the European Central Bank embarks on a bond purchasing binge, the quantitative easing event has depressed yields across the Eurozone and pushed many toward riskier assets in search of higher payouts. Fixed-income investors may capitalize on the shift with high-yield international bond exchange traded funds that include European debt exposure.
The ECB has enacted a €80 billion monthly quantitative easing program and raised the range of assets that it can acquire, including corporate bonds alongside government debt, asset-backed securities and covered bonds, reports Gavin Jackson for the Financial Times.
Since the program was announced, Europe has seen a dearth in available paper for purchase as the ECB has become a major buyer of corporate debt that is not very liquid or large. Consequently, even a small QE could have a large effect on yields or prop up bond prices.
“The market is basically struggling to reprice to fundamentals,” Mitch Reznick, co-head of credit at Hermes Investment Management, told the Financial Times. “The distortion is real.”
Due to its aggressive plan, the ECB has acquired both outstanding investment-grade corporate bonds and new issues, partly due to the problem of securing enough debt in the secondary markets.
“We expect the ECB to buy between three and five billion a month. If you think they’re doing that for seven months, that’s almost all the net issuance from ECB-eligible companies,” Joseph Faith, a credit strategist at Citi, told the Financial Times.
[related_stories]Consequently, with all the European investment-grade corporate bonds mostly spoken for, Eurozone investors may turn to riskier speculative-grade debt to meet their income needs, bolstering the high-yield market.
While there are no Europe-focused speculative-grade debt ETFs on the market, U.S. investors can still gain exposure to European high-yield bonds through international bond ETFs with heavy tilts toward European countries.
For instance, the Market Vectors International High Yield Bond ETF (NYSEArca: IHY) includes a 15.5% exposure to U.K., 9.0% Italy, 6.3% Germany, 5.8% France, 4.2% Luxembourg, 1.5% Liechtenstein, 1.4% Switzerland and 1.4% Netherlands. IHY has a 0.40% expense ratio and a 6.6% 30-day SEC yield.
The SPDR International High Yield Bond ETF (NYSEArca: IJNK) top European country weights include U.K. 16.3%, Italy 13.6%, France 9.9%, Germany 10.0% and Luxembourg 7.9%. IJNK has a 0.40% expense ratio and a 5.76% 30-day SEC yield.
Top country holdings in the iShares Global ex USD High Yield Corporate Bond ETF (NYSEArca: HYXU) include Italy 22.4%, Germany 14.8%, U.K. 14.4%, France 10.3% and Luxembourg 6.0%. HYXU has a 0.40% expense ratio and a 4.09% 30-day SEC yield.
Year-to-date, IHY rose 6.3%, IJNK was up 2.8% and HYXU increased 7.7%.