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Another High-Yield Bond ETF To Consider

June 23, 2016 3:47 pm
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Amid rebounding commodities prices and still low U.S. interest rates, high-yield corporate bond exchange-traded funds are rebounding this year. So are emerging markets bond ETFs. Combing those two asset classes could prove potent.

Combining Asset Classes

That can be done with the VanEck Vectors Emerging Markets High Yield Bond ETF (Market Vectors ETF Trust (NYSE: HYEM)). HYEM follows the Bank of America Merrill Lynch Diversified High Yield US Emerging Markets Corporate Plus Index (EMLH), a benchmark “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.

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At a time of increased defaults in the U.S. high-yield bond market, with most of those defaults still hailing from oil and gas issuers, it is notable that on a historical basis, high-yield emerging markets corporates have lower default rates than their U.S. counterparts.

<>“The high yield emerging markets bond sector, as measured by the BofA Merrill Lynch Diversified High Yield US Emerging Markets Corporate Plus Index, has grown tremendously in the past 10 years, from a market value of $33 billion in 2006 to approximately $346 billion today. Although emerging markets corporate issuers may issue bonds denominated in local currencies, the vast majority of high yield emerging markets bonds are U.S. dollar denominated (and are the focus here), which significantly reduces the currency risk to U.S. investors,” according to a VanEck research note.

Eking Ahead Of U.S. Equivalents

HYEM has some advantages over its U.S. equivalents. For example, the ETF's effective duration of 3.75 is lower than some traditional U.S. junk bond ETFs, while HYEM's 30-day SEC yield of 7.24 percent is far higher than its U.S. counterparts. In other words, HYEM investors are compensated for perceived risk although the lower default rates imply HYEM could actually be less risky than a rival U.S. fund.

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Additionally, some emerging markets corporate issuers may be saddled with higher financing because of their nation's sovereign rating. After all, it is possible for Brazilian issuers to have investment-grade ratings although that country's sovereigns are junk. However, that does not change the fact that investors will demand higher yields on those investment-grade issues.

“The yield provided by high yield emerging markets bonds reflects both the potential risks and the value that the asset class can provide. High yield emerging markets bonds can provide an income-producing complement to an investment in emerging markets equities, and can also provide issuer and regional diversification alongside a domestic high yield allocation,” added VanEck.

China, Brazil and Russia combine for nearly 30 percent of HYEM's weight.

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