High-yield corporate bonds are often considered one of the more adventurous segments of the fixed income market. The VanEck Vectors EM High Yield Bond ETF (NYSEArca: HYEM) adds emerging markets to the equation increasing an investors’ income and risk profile, but nonetheless the fund is up nearly 8% this year and has been less volatile than the largest domestic junk bond and emerging markets bond ETFs.
HYEM seeks to replicate the ICE BofAML Diversified High Yield US Emerging Markets Corporate Plus Index, which is comprised of U.S. dollar denominated bonds issued by non-sovereign emerging market issuers that have a below investment grade rating and that are issued in the major domestic and Eurobond markets.
While HYEM is trailing domestic junk bond ETFs in terms of total returns this year, some data points suggest high-yield corporate debt from emerging markets issuers is actually quite healthy.
“Relative to the U.S., emerging markets corporate bond markets are exhibiting healthier and improving credit metrics,” according to VanEck research. “This is illustrated by the dramatic decline in net leverage over the past three years, compared to U.S. levels that have not shown the same improvement.”
Emerging Market Bonds Outlook
Emerging market bonds still look attractive because the asset class took a double whammy last year after the Federal Reserve raised interest rates and the U.S. dollar appreciated against its global peers. The outlook for the asset class this year now looks very different, with the Federal Reserve hinting at easing up its interest rate hikes and the U.S. dollar now showing a weaker outlook.
Declining leverage “has been driven by lower debt levels and higher revenue growth, particularly in the high yield segment of the market,” notes VanEck. “High yield total debt has declined 5% versus one year ago, with Latin America and EMEA posting the highest declines. Total debt among Asian high yield issuers showed a small increase of 3% and EBITDA growth among those issuers in 2018 was the strongest versus other regions, although all regions posted increases.”
HYEM holds nearly 550 bonds, about 89% of which are rated BB or B. The fund has a 30-day SEC yield of 6.86% and an effective duration of 3.53 years.
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