Fixed-income investors may want to take a look at European junk bonds and international debt-related exchange traded funds to diversify an investment portfolio and generate attractive yields.
While there are no U.S.-listed Europe region-specific bond ETFs available, investors can still gain exposure to the area’s high-yield bond market through international bond ETFs. For instance, the Market Vectors International High Yield Bond ETF (IHY) includes about 56.2% exposure to European debt, iShares Global ex USD High Yield Corporate Bond ETF (HYXU) includes a 84.4% exposure to European countries and SPDR Barclays International High Yield Bond ETF (IJNK) holds 75.6% European bonds.
The high-yield bond ETFs come with attractive income opportunities. IHY shows a 6.68% 30-day SEC yield, HYXU has a 4.48% 30-day SEC yield and IJNK has a 5.72% 30-day SEC yield.
Some bond observers point to European speculative-grade bond market’s low exposure to troubled energy companies as a major selling point for investors.
“There’s one major difference between the two — almost no energy company has issued in the European high yield market,” Henrik Johnsson, head of European high yield at Deutsche Bank, told the Financial Times. “We’ve been very insulated from what’s gone on in the US.”
With the oil and gas industry accounting for about a fifth of U.S. high-yield debt outstanding, defaults appear more likely as companies that borrowed when oil traded at $100 per barrel begin to struggle to adjust to a low oil environment.
Moreover, overseas debt securities are more likely to strengthen as diverging monetary policies begin to affect the fixed-income markets. In the Eurozone, the European Central Bank is engaged in quantitative easing while the Federal Reserve is more likely to hike interest rates in the coming months.
“The market is assuming that the Fed will move as soon as it thinks it is appropriate, while in Europe the assumption is that there could be another round of quantitative easing,” Mathew Cestar, co-head of global credit products in Europe, the Middle East and Africa for Credit Suisse, told the Financial Times.
Moreover, while the European high-yield debt market is less developed than that of the U.S., the immaturity in European junk bonds means that the market is filled with higher quality debt, with about 62% of issuers ranked at the BB-rating, or toward the upper end of the quality spectrum, according to Morgan Stanley. In contrast, U.S. speculative-grade issuers are distributed further down toward CCC-ratings.
Looking at the international high-yield bond ETF credit qualities, debt securities also lean toward the upper end of the quality spectrum. For instance, IHY includes 60.1% BB, 27.3% B and 4.5% CCC. HYXU holds 61.9% BB, 31.9% B and 4.7% CCC.
For more information on the fixed-income market, visit our bond ETFs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.