High-yield corporate bonds are often viewed as a controversial segment of the fixed income universe. For emerging markets junk bonds, that sentiment is even more pronounced.

Investors can access emerging markets junk bonds with exchange traded funds such as the VanEck Market Vectors EM High Yield Bond ETF (NYSEArca: HYEM) and iShares Emerging Markets High Yield Bond ETF (CBOE: EMHY), which are up an average of 3.55% this year. However, some market observers see risks to consider with emerging markets junk bonds.

“After a bruising rout, emerging-market junk bonds are scaling a golden mountain,” reports Financial Express. “Credit seems like the right place to be these days. Since a low in late November, Asia’s high-yield corporate bonds have already risen more than 4%, while emerging-market stocks have been trading sideways.”

The iShares Emerging Markets High Yield Bond ETF, which tracks the Morningstar Emerging Markets High Yield Bond Index, holds nearly 450 emerging markets junk bonds. The fund has an effective duration of 5.29 years and a 30-day SEC yield of 6.58%.

China Considerations

The VanEck Vectors Emerging Markets High Yield Bond ETF holds nearly 500 emerging markets junk bonds with an effective duration of 3.50 years and a 30-day SEC yield of 7.41%.That fund allocates 12.48% of its weight to Chinese high-yield debt. Some analysts see China’s voracious appetite for high-yield debt as potentially problematic, particularly in the real estate sector.

“In this lower-for-longer rate environment, junk issues are seductive,” according to Financial Express. “Since November, China’s real-estate developers—the elephant in the market—have been racing to raise dollar bonds, at the expense of offering average interest payments of about 10%. Meanwhile, because of their high-yield nature, these issuers tend to sell bonds with two-year maturities.”

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