The current market environment has proven to be more constructive in terms of higher-yielding asset classes for 2020. ETF Trends spoke with J.P. Lee, ETF Product Manager for VanEck, who had plenty to say about high yield in various areas, including emerging markets.
As noted by Lee, areas such as emerging markets in high yield could stand to attract some investor interest, given where returns currently are globally. Combining this with the current uptick in growth that began in 2020, a very accommodative central bank policy, and the potential for a possibly weaker dollar may be great for emerging market local currency.
For many of the same reasons, Lee believes emerging markets high yield corporates could prove to be very attractive. It’s a high yielding asset class where the yield is over around 65%. So, all those growth drivers for emerging markets should benefit that asset class.
Additionally, as Lee states, “The fundamentals for EM corporates compare very favorably for U.S. high yields. So, if there are concerns around deteriorating credit metrics in U.S. high yields, EM corporates could be a place for investors to look.”
Praise To ANGL
Still, in terms of high domestic yield, VanEck continues to be all about the VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL). The fund had a very good 2019 and outperformed the broad market by around 2%. This was due to a few things. The higher quality tilt of ANGL helped the portfolio for the broader market. Moreover, the technical success of buying undervalued, oversold bonds helped performance, as well as the subsequent recovery, following the purchase of those bonds.
“A higher quality aspect of ANGL could be attractive this year unless it does become more defensive,” Lee states. “I think the high yield returns have been very strong. It obviously spreads us around on the tighter end of the historical range, though their not necessarily historically tight, they’re not wide. Overall yields are very low.”
Lee continued by noting, however, that to the extent investors view concern about the high levels of debt in the corporate bond market, or if there’s a negative growth decried, it means a more top quality set of ANGLs. As a result, that could provide a level of defensiveness for high yield investors.
On top of that, you’re not giving up a lot of yield right now to invest in higher quality ends through ANGL. It’s a lower than historical yield differential between ANGL and the broader high yield market. So, not sacrificing a lot of yield and getting a much more satisfying total return.
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