Be Bold With This Junk Bond ETF

June 18, 2019 12:00 pm
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Be Bold With This Junk Bond ETF

Being bold with fixed income exchange traded funds is paying off this year. For example, the largest emerging markets bond ETF is up 9.3% year to date while the largest high-yield corporate bond ETF is higher by 8.8%.

Put those two themes together and the result is the VanEck Vectors Emerging Markets High Yield Bond ETF (NYSE:HYEM), which is up nearly 8% this year. While that trails its aforementioned counterparts, HYEM, perhaps surprisingly, has been less volatile than the largest junk bond and emerging markets bond ETFs this year.

“Relative to the U.S., emerging markets corporate bond markets are exhibiting healthier and improving credit metrics,” said VanEck in a recent research note. “This is illustrated by the dramatic decline in net leverage over the past three years, compared to U.S. levels that have not shown the same improvement.”

Why It's Important

HYEM holds nearly 550 bonds, over 89% of which are rated BB or B, about the same percentage as is found in the domestically-focused Markit iBoxx USD Liquid High Yield Index. Plus, HYEM as fewer CCC-rated bonds than are found in the Markit iBoxx USD Liquid High Yield Index. However, HYEM's 30-day SEC yield is 123 basis points higher than the Markit iBoxx USD Liquid High Yield Index's.

Still, there are risks to consider with HYEM.

“High yield total debt has declined 5% versus one year ago, with Latin America and EMEA posting the highest declines,” said VanEck. “Total debt among Asian high yield issuers showed a small increase of 3% and EBITDA growth among those issuers in 2018 was the strongest versus other regions, although all regions posted increases.”

Debt issued by China, Brazil and Turkey combines for over 30% of HYEM's weight.

What's Next

When considering a fund like HYEM, investors need to evaluate risk-reward scenarios. Although the fund has trailed its U.S. rivals this year, that scenario could be poised to shift in HYEM's favor.

“For emerging markets high yield bond investors, the ultimate question is whether there is adequate compensation for the risk being taken, both on an absolute basis and relative to other asset classes,” said VanEck. “The recent widening in credit spreads in conjunction with improved fundamentals has resulted in what we believe is a potentially attractive risk/reward tradeoff in emerging markets high yield corporate bonds.”

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