Investors looking to embrace high-yield corporate for income-generating and portfolio diversification purposes often to turn to domestic debt and the related ETFs, but there is a big universe of junk bonds to consider beyond U.S. borders.
The VanEck Market Vectors EM High Yield Bond ETF (NYSEArca: HYEM) is one ETF that help investors access ex-US junk bonds while still delivering an impressive yield. The $387.4 million HYEM holds about 670 bonds and yields 5.30%, according to issuer data.
HYEM, which turns eight years old in May, follows the ICE BofAML Diversified High Yield US Emerging Markets Corporate Plus Index. That benchmark “is comprised of U.S. dollar-denominated bonds issued by non-sovereign emerging markets issuers that are rated below investment grade and that are issued in the major domestic and Eurobond markets,” according to VanEck.
The notion that low yields could persist for some time in addition to the recent U.S.-China trade deal could spur more high-yield debt acquisitions. Until that narrative changes, it’s still risk-on for investors willing to take the higher yield for the increased chance of debt default.
Help From HYEM
While yields are tight, there are still compelling reasons to consider HYEM.
“Although yields are tight by historical standards, comparisons between different segments of the global high yield market reveal potential opportunities,” said VanEck in a recent note. “For example, although absolute yields of emerging markets high yield corporate bonds have tightened in recent years, we believe the yield pickup over U.S. high yield compares favorably from a historical perspective. The excess yield of emerging markets over U.S. high yield corporate bonds currently exceeds the levels of 2016, when credit spreads overall peaked, as well as the average level since then.”
At the end of 2019, HYEM allocated about 30% of its weight to China, Brazil, and Turkey – countries that are unlikely to raise interest rates anytime soon. In the case of Brazil, Latin America’s largest economy is a likely interest rate cutter this year.
Importantly, a case can be made that there’s value in emerging markets junk debt.
“We believe this relative value opportunity is perhaps even more attractive in light of the robust credit fundamentals the asset class exhibits, which compare favorably to U.S. high yield corporates – from both a static and directional point of view,” notes VanEck. “For example, interest coverage ratios among emerging markets high yield issuers were nearly 20% higher than U.S. counterparts, while net leverage was 20% lower, and the 2019 default rate among emerging markets high yield issuers was lower than the U.S. high yield default rate.”
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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.