When it comes to investing in high-yield corporate bonds, many investors focus on domestic issues and the related exchange traded funds. However, there are compelling opportunities with high-yield debt outside the U.S., including emerging markets bonds.
The VanEck Vectors Emerging Markets High Yield Bond ETF (NYSEArca: HYEM) is one way of accessing emerging markets junk-rated debt.
HYEM, which recently turned six years old, tracks the ICE BofAML Diversified High Yield US Emerging Markets Corporate Plus Index (EMLH). That index “is comprised of U.S. dollar-denominated bonds issued by non-sovereign emerging markets issuers that are rated below investment grade and that are issued in the major domestic and Eurobond markets,” according to VanEck.
Emerging market fundamentals, like growth, debt stock, real rates and policy flexibility, all remain at a favorable starting point relative to developed economies going forward.
“Emerging markets high yield corporate bonds have historically provided a yield advantage over their U.S. counterparts, though the relationship has inverted several times historically,” said VanEck in a recent note. “The real and perceived additional risks associated with emerging markets, including political and liquidity risks, have generally led investors to demand a higher yield from an emerging market corporate bond versus a U.S. one, assuming all else equal (e.g., same industry and credit rating).”