Even with the Federal Reserve poised to soon raise interest rates, the income environment in the U.S. remains challenging.
However, yield-hungry investors can find pleasant surprises with some asset classes they may not be thinking of. That includes emerging markets high-yield debt, which is accessible with exchange traded funds, including the VanEck Vectors Emerging Markets High Yield Bond ETF (HYEM).
Alone, junk bonds yield more than investment-grade counterparts and government. Add emerging markets to the equation, and yields are further amplified, as highlighted by HYEM’s 30-day SEC yield of 6.40%. That data point indicates that investors are being compensated for the risks associated with this asset class. There are also potential rewards.
“All else equal, higher yielding asset classes may hold up better as rates rise because a higher level of income earned will help to offset price losses as rates rise. That is why some investors prefer asset classes like high yield corporate bonds over investment grade corporate bonds right now,” says Fran Rodilosso, VanEck head of ETF fixed income portfolio management.
The $1.3 billion HYEM follows the ICE BofA Diversified High Yield US Emerging Markets Corporate Plus Index and holds 865 dollar-denominated bonds from non-sovereign issuers with junk issuers.
“Emerging markets high yield corporate bonds, as represented by the ICE BofA Diversified High Yield US Emerging Markets Corporate Plus Index, presently offer a significant pick up in yield versus U.S. high yield, as represented by the ICE BofA US High Yield Index, despite having a higher overall average credit quality,” adds Rodilosso.
That’s right: HYEM investors get a higher yield with superior credit quality than they earn with a comparable U.S.-focused fund. In any environment, that’s an enviable combination. More than 86% of HYEM’s holdings are rated BB or B. The fund has an effective duration of 3.75 years, according to issuer data. That’s a lower duration than investors find with the average U.S. junk, investment-grade, and aggregate bond funds.
As Rodilosso notes, emerging markets high-yield bonds topped Fed funds futures in the 2015 through 2019 period, potentially adding to the case for HYEM today.
China and Brazil are the largest issuers in the fund, combining for over 21% of its geographic exposure. Mexico, Turkey, and Colombia combine for another 19%. More than 51% of the bonds in HYEM are issued by financial services and energy companies.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.