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).”
Related: Understanding Bond ETFs and How to Trade Them
HYEM Portfolio Details
HYEM, home to nearly $321 million in assets under management, holds 475 bonds. The average portfolio maturity is 4.90 years. Over 93% of HYEM’s holdings are rated BB or B and the ETF features little exposure to highly speculative CCC-rated debt.
“Emerging markets growth still provides a favorable backdrop both outright and relative to developed markets, although the repercussions of a trade war may pose a threat to this dynamic,” according to VanEck. “Leverage ratios and interest coverage among emerging markets high yield issuers have improved steadily since mid-2016, as they have for U.S. high yield borrowers. But investors are being compensated with approximately 30% more yield spread above Treasuries per unit of leverage for emerging markets high yield bonds versus U.S. ones.”
HYEM has an effective duration of 3.66 years and a 30-day SEC yield of 6.76%. China, Brazil and Turkey combine for over 30% of the fund’s geographic exposure. Bonds featured in HYEM are dollar-denominated.
For more information on the fixed-income market, visit our bond ETFs category.