Some fixed-income investors have turned to international markets to generate more attractive returns in a persistently low-yield environment. Bond exchange traded fund investors may look to investment-grade emerging market debt as an attractive source of returns.
William Sokol, ETF Product Manager at VanEck, told ETF Trends in a call that the investment-grade emerging market has been recently outperforming the high-yield, speculative-grade debt segment as some risks dragged on junk EM bonds.
For instance, high-yield Venezuela debt is still a lingering story as conditions continue to deteriorate and recently getting worse, with the economy falling into a death spiral of runaway inflation, collapsing currency and shortage of goods.
While still performing relatively well, the VanEck Vectors Emerging Markets High Yield Bond ETF (NYSEArca: HYEM) has been overshadowed by the VanEck Vectors EM Investment Grade + BB Rated USD Sovereign Bond ETF (NYSEArca: IGEM), which provide exposure to investment-grade U.S. dollar-denominated emerging debt securities. Year-to-date, HYEM gained 5.1% while IGEM increased 6.3%.
IGEM tries to reflect the performance of the J.P. Morgan Custom EM Investment Grade Plus BB-Rated Sovereign USD Bond Index. According to VanEck, EM investment-grade sovereign debt has historically generated higher yields versus similarly rated U.S. dollar-denominated corporate bonds. Furthermore, the USD-denominated debt tries to limit exposure to the volatility associated with EM currencies by investing in only bonds issued in U.S. dollars.