Stay a Step Ahead of Treasury Yields with the HYEM ETF

Treasury yields are moving higher, causing stocks to head in the other direction. Fixed income investors looking to stay head of benchmark government debt can look overseas with the VanEck Vectors EM High Yield Bond ETF (HYEM).

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.

As of March 4, the fund has a 30-day SEC yield of 4.65%, a distribution yield of 4.92%, and a 12-month yield of 5.42%. The current 10-year Treasury rate stands at about 1.5% in comparison.

“HYEM offers unique exposure in two regards; it focuses on junk bonds of companies headquartered in emerging markets,” ETF Database analysis noted. “As such, this ETF has the potential to bring geographic and currency diversification to a fixed income portfolio while also delivering returns materially higher than those on investment grade debt. HYEM focuses on U.S. dollar-denominated debt, which removes the foreign exchange rate risk from the equation.”

The exchange traded fund:

  • Focuses solely on the non-sovereign segment of the high yield emerging markets bond market
  • Currently has lower average duration compared to high yield U.S. corporate bonds
  • Boasts lower historical default rates than high yield U.S. corporate bonds

HYEM Distribution Yield Chart

Questionable Valuations and Rising Yields

The major indexes were riding a vaccine rally since the middle of last year, but now investors are questioning whether or not the stock market might be overheated. As a Bloomberg article mentioned, the “Treasury market may be just one spark away from exploding and sending 10-year yields all the way up to 2%, suggesting that the rout of 2021 may not yet be over and raising the chances that other assets like emerging-market bonds might also be living on borrowed time.”

This could help make emerging markets more attractive, given that analysts are projecting that “the target on Treasury yields around half a percentage point higher than current levels following the rapid, reflation-fueled selloff that took the market by storm last week. Should that happen, it’s not just developed markets that will be left reeling.”

“Developing-market bonds are increasingly at risk as investor concern grows about stretched valuations and the chances of a policy misstep by the Federal Reserve,” the article added.

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