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Getting The Emerging Markets Compensation You Deserve

ETF Professor

As has been widely over the course of 2019, emerging markets bonds are great sources of yield for investors that can handle the added risk and there is plenty of that go around.

Emerging markets bonds yield noticeably more than developed markets equivalents, but for investors wanting even more yield, junk debt from developing economies can be a consideration. The VanEck Vectors Emerging Markets High Yield Bond ETF (NYSE: HYEM), which has returned nearly 5% year to date, provides that access.

The $327.7 million HYEM tracks the ICE BofAML Diversified High Yield US Emerging Markets Corporate Plus Index and has a 30-day SEC yield of nearly 6%, well above the 5.23% found on the largest domestic high-yield corporate debt ETF.

The comparison is relevant because HYEM holds dollar-denominated debt issued by emerging markets non-sovereign entities.

Why It's Important

“With positive fundamentals in Russia and the prospect of structural reforms in Brazil, these countries are, not surprisingly, among the top contributors this year,” VanEck said in a recent note. “Perhaps more surprising is that China, Turkey and South Africa are also outperforming, given the various domestic and geopolitical issues impacting those countries.”

Brazil and Russia combine for 15.50% of HYEM's geographic exposure while China, Turkey and South Africa combine for over 35%.

“In some cases, such as China and Turkey, it reflects a recovery following last year’s underperformance,” according to VanEck. “Tighter credit spreads among Chinese, Turkish, Brazilian, Russian and South African companies have contributed significantly to performance, but spread movements on the index overall have had a neutral return impact.”

What's Next

Default rates on Chinese junk-rated corporates have been benign this year, providing some assistance to HYEM because China is the fund's largest geographic exposure at 12.20%. To this point, HYEM hasn't been derailed by an almost 10% allocation to CCC-rated bonds, the most speculative corner of the high-yield space.

For investors looking for outperformance of emerging markets equities with HYEM, the fund is beating some individual markets, but is likely to lag broader developing world benchmarks this year.

“Finally, the differences between equity and high yield returns within countries is significant in many cases,” notes VanEck. “For example, Turkish high yield corporates have returned nearly 15% this year, compared to equity returns of less than 2%. South African high yield has returned approximately 13%, versus nearly flat equity returns. In contrast, Russian high yield bonds have returned approximately 12%, significantly lagging equities. These differences underscore the diversification benefits that emerging markets high yield corporate bonds can provide within a broader emerging markets portfolio.”

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