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Junk Bonds, Emerging Markets: A Bad ETF Combo Right Now


Some combinations, think peanut butter and jelly or autumn and football, are tried and true. Others are just trying. At least that is the current state of affairs for emerging markets ETFs that hold high-yield bonds. Individually, emerging markets debt and high-yield have hit a rough patch. On Tuesday, the PowerShares Emerging Markets Sovereign Debt Portfolio (PCY) hit a new 52-week low. In the past month, the SPDR Barclays High Yield Bond ETF (JNK) is down almost 4%.

The iShares Emerging Markets High Yield Bond Fund (EMHY) is enduring its own woes as investors are scurrying out of both emerging markets and junk debt amid lingering fears about rising rates in the U.S. [Emerging Markets Bond ETFs Slide on Rate Jitters]

Things have not always been this hard for EMHY. The ETF debuted 14 months ago and has managed to rake in an impressive $248.5 million in assets. Perhaps surprisingly, the fund has not seen any outflows since the start of this month, according to Index Universe data.

EMHY’s timing when it debuted was good. The ETF came to market in the sweet spot of a fierce yield grab fueled by accommodating monetary policy from scores of central banks, the Federal Reserve included. Investors not only embraced EMHY for its stout yield, currently 5.42% on a trailing 12-month basis, but also for its capital appreciation potential. [Emerging Markets Bond ETFs With Attractive Yields]

Heavy allocations to Turkey and the Philippines ahead of those countries’ ascending to investment-grade credit ratings helped EMHY gain over 12 % from June 2012 through January 2013. Fast-forward to June 2013 and it is the very countries that helped lift EMHY (and other emerging markets bond ETFs) to prominence that are now hindering the fund. [Short Interest Surges in EM Bond ETF]

At the end of the first quarter, Turkey and the Philippines were EMHY’s largest and third-largest country weights with allocations of 17.1% and 10.6%, respectively, according to iShares data.

A plunging peso has forced investors out of Philippine equities and debt despite the country’s bright long-term prospects, sending yields on bonds due November 2037 to the highest levels since February. Still historically low, yields on Philippine 10-years are up almost 40 basis points in the past month, according to Trading Economics.

Turkey is another regrettable story. Anti-government protests have cast a dark cloud over the country many outsiders viewed as the most economically advanced in the Arab world. Yields on Turkish 10-years have surged about 100 basis points in a week.

Not surprisingly, EMHY is down 5.5% over the same time. EMHY is an ETF with “bounce” potential, but calling a near-term bottom is the difficult part.

iShares Emerging Markets High Yield Bond Fund

ETF Trends editorial team contributed to this report.

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.