At a time of weakness for broad domestic fixed income strategies, many investors may be pensive about international bonds, let alone high-yield emerging markets corporates. That’s understandable, but a deeper examination is merited because there is potential for pleasant surprises. Take the case of the VanEck Emerging Markets High Yield Bond ETF (HYEM).
HYEM, which follows the ICE BofA Diversified High Yield US Emerging Markets Corporate Plus Index, holds dollar-denominated, junk-rated bonds issued by emerging markets companies. Sure, that sounds risky, but HYEM has been less volatile over the past three years than the most widely observed gauges of domestic high-yield and investment-grade corporates.
Owing to the Federal Reserve’s recent rate-tightening campaign, HYEM outperformed the Bloomberg U.S. Aggregate Bond Index by nearly 600 basis points over the past three years. That coupled with the exchange traded fund’s tantalizing 30-day SEC yield of 7.71% are sources of allure, but there’s more to the HYEM story.
HYEM Has Benefits
Due to the perception that emerging markets corporates, regardless of credit quality, are riskier than U.S. equivalents, advisors and investors are right to question what benefits a fund like HYEM offers. Fortunately, the list of HYEM perks is extensive.
“Investing in high yield EM corporates can provide several benefits within a broader high yield portfolio, including yield pickup, higher quality, and diversification benefits,” according to VanEck research.
Indeed, emerging markets junk corporates, broadly speaking, sport higher yields than other forms of developing world debt, including dollar-denominated sovereigns and local currency bonds. Typically, higher yields are a symptom of investors demanding more compensation for lower credit quality, but underscoring another benefit of HYEM is the point that ETF isn’t excessively risky on the credit front.
“Further, compared to U.S. HY bond issuers, EM HY corporate bonds have a higher tilt to BB-rated bonds and conversely, a lower exposure to single B and CCC issuers. In addition, high yield EM issuers have historically exhibited lower levels of leverage (given their higher spreads), which translates to a higher spread per unit of leverage,” added VanEck.
Another perk associated with HYEM is that by implementing the ETF into a portfolio that includes emerging markets stocks, asset allocators can reduce some of the risk associated with the latter asset class while still levering clients to growth stories.
“Moreover, HY EM corporates can serve as a complement to EM equities, offering potentially lower volatility and a different risk-return profile. Alongside an EM equity allocation, EM corporate bond exposure can allow investors to capture EM growth opportunities while generating attractive income and lowering the volatility of an overall EM allocation,” concluded VanEck.
For more news, information, and analysis, visit the Beyond Basic Beta Channel.
