HYEM: The Best Choice in Junk Bond ETFs?

Zacks

Although the Fed’s low rate policy has now gone global, many investors are still searching for pockets of high yielding securities in order to boost lagging income levels. While markets close to home in more exotic segments like MLPs or REITs have been pretty much tapped out, some in emerging markets still possess more desirable levels of current income.

That is because while the Fed, and to a lesser extent the ECB, have kept a lid on rates at home, corresponding levels in emerging markets are still much higher. While at least part of this is due to inflation levels, at least a piece is also a result of these markets’ higher growth rates (see The Five Best ETFs over the Past Five Years).

For example, benchmark rates in countries like Brazil, India, and China are well above the 5% threshold, beating out nearly every developed market out there. This situation helps to keep the yields relatively high for debt in these countries, while it also boosts payouts for corporate debt as well.

This is because corporate bonds require a risk premium over their sovereign debt cousins in order to compensate investors for the added default risk. Governments can always print more—at least when debt is denominated in a local currency—so the risk is usually less for these institutions than their corporate counterparts (see Forget T-Bonds, Invest in These Top Corporate Bond ETFs).

Fortunately this added risk usually results in a higher payout to investors which can be especially important in these uncertain markets. If investors are willing to take it one step further and truly seek impressive payouts in the developing nation corporate market, a look to junk bonds could be the way to go.

These securities, which are below investment grade in more risky nations, can potentially have yields that crush their developed market or non-junk counterparts. Furthermore, while the strategy may sound risky, an ETF approach that holds dozens of different bonds from around the world should help to reduce company and country specific risk in case any one firm falters (See Three ETFs with Incredible Diversification).

A junk emerging market corporate bond ETF can also offer up some impressive diversification benefits too, as many firms in this segment are unlikely to be found in a number of other total market bond ETFs or similar fixed income products. For these reasons, investors could consider the emerging market junk bond ETF detailed below for a new way to potentially achieve yield in today’s uncertain low rate environment:

Market Vectors Emerging Markets High Yield Bond ETF (HYEM)

This relatively new ETF tracks the BofA Merrill Lynch High Yield US Emerging Markets Liquid Corporate Plus Index, a benchmark of junk-rated emerging market bonds that are dollar denominated. The security focuses in on bonds at the high end of the junk spectrum as just 2.9% are rated ‘CCC’ while 50% are rated ‘BB’ (read Top Four High Yield Bond ETFs).

It should also be noted that the product hones in on low duration securities as bonds that mature in 10 years or less make up the vast majority of the index. This should help to reduce the interest rate risk of the fund overall, although it could cut into the overall yield of the product.

In terms of sectors, basic industry bonds make up roughly 21%, followed closely by banking (15.8%), energy (13.5%), and real estate (12.8%). Nationally, the product is exposed to Chinese and Russian bonds with nearly 30% of the portfolio, while Venezuela, Brazil, and Indonesia round out the top five with roughly 8% each.

While the product is quite diversified, the real promise of the fund comes in its yield, which in 30 Day SEC terms is nearly 6.6%. Meanwhile, fees are also relatively low at 40 basis points a year so the total payout is quite high for this ETF (read Three Overlooked High Yield ETFs).

If that wasn’t enough, this junk corporate bond ETF has also beat out similar ETFs that have a U.S. focus as well. JNK and HYG, two of the most popular ETFs in the junk bond segment, are both trailing HYEM since inception by roughly 3% in terms of price appreciation while they also yield less by about 100 basis points as well.

So even though the space is relatively new and overlooked by many investors, it is capable of being a better choice in the high yield bond ETF market. Not only has performance been better, but yields have been more robust as well, suggesting that for investors who can overlook the low volume and modest bid ask spreads, HYEM could be an interesting addition to a portfolio starved for yield.

 

 

HYEM

Holdings

106

Biggest Nations

China/Russia (about 14% each)

Yield

6.6%

Expense Ratio

0.40%

AUM

$21.0 million

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Read the analyst report on HYEM

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