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.
Related: Income Seekers May Find Attractive Yields in EM Bond ETFs
The investment-grade EM bond ETF has a 0.40% expense ratio, a 3.45% 30-day SEC yield and a 8.28 year effective duration.
Top country weights include Mexico 9.6%, Indonesia 7.6%, Philippines 8.0%, Panama 5.4% and Hungary 5.3%. IGEM may also diversify an investor’s portfolio relative to traditional emerging market equity exposure as the investment-grade bond ETF’s country weights lean toward Latin American countries, whereas EM stocks tilt toward Asia, namely China.
It’s also interesting to note it IGEM has also outperformed iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB) in the last 3 months, which represents the broader universe of investment grade and high yield USD sovereign bonds, and is essentially in line YTD.
For more information on the fixed-income space, visit our bond ETFs category.