Income Seekers May Find Attractive Yields in EM Bond ETFs

Emerging market bonds and related exchange traded funds now offer higher yields with a lower duration than U.S. speculative-grade debt, potentially providing income-minded investors an attractive alternative in a stubbornly persistent low-yield environment.

In a research note, Fran Rodilosso, Head of Fixed Income ETF Portfolio Management at VanEck, pointed out that emerging markets high yield bonds offered a 90 basis point yield pickup as of June 30 with a lower duration and a higher average credit quality, compared to U.S. junk bonds.

Duration is a measure of a bond fund’s sensitivity to changes in interest rates. High-yield EM debt shows a 3.75 year duration, compared to U.S. junk bond’s 4.04 year duration.

Additionally, about 60% of the emerging markets’ high yield index is rated BB- or higher, compared to less than 50% in the U.S. speculative-grade debt market.

All in all, Rodilosso painted a picture where fixed-income investors may find more attractive yields with lower credit risk when looking into emerging market speculative grade debt over U.S. high-yield bonds.

More investors are beginning to realize the benefits of diversifying into emerging market high yield debt. Over the past decade, the EM high-yield bond market has expanded to $440 billion as of June 30 from $56 billion at the end of 2007. Along with its growing size, investors have gained access to a more diverse exposure of 339 issuers in 48 countries.