Van Eck rolled out another international high yield product this week, debuting its Market Vectors Emerging Markets High Yield Bond ETF (HYEM). The new fund will seek to replicate the BofA Merrill Lynch High Yield US Emerging Markets Liquid Corporate Plus Index, a benchmark that consists of debt from issuers in a number of developing economies.
As interest rates have remained near record lows, investors looking to generate meaningful yields form their portfolio have embraced fixed income securities besides Treasuries and high quality corporate debt. In many cases, that has meant increased allocations to junk bonds and international bonds, which often feature higher yields than otherwise similar domestic bonds. HYEM represents a way to tap into the fast-growing junk bond market outside of the U.S., potentially bringing geographic diversification to fixed income portfolios and delivering yet another option for investors seeking substantial yields.
Emerging markets junk bonds offer higher yields than both emerging market sovereigns and domestic corporate bonds, and have been shown to exhibit lower default rates historically than U.S. debt.
The index underlying HYEM consists of dollar-denominated debt, meaning that investors are not exposed to any exchange rate risk. While sovereign debt markets in emerging economies have progressed to include debt denominated in both dollars and the local currency, corporate bond markets still utilize the greenback almost exclusively. So while investors looking to hold local currency sovereign debt have options such as the WisdomTree Emerging Markets Local Debt Fund (ELD), those focusing on corporate debt don’t yet have those options [see High Yield ETFdb Portfolio].
Under The Hood
Avg. Yield To Worst
Avg. Modified Duration
The HYEM portfolio contains bonds from more than 30 different emerging market economies around the globe, including Asia, South America, the Middle East, and eastern Europe. China is the largest country allocation at about 12% of assets, followed by Russia (12%), Indonesia (8%), and Venezuela (7%). Rounding out the top ten are Brazil, Mexico, the UAE, India, Ukraine, and Turkey.
From a sector perspective, HYEM maintains a relatively small weighting in financials (18%). Industrials (64%) and utilities (10%) make up the bulk of the portfolio. The underlying index, which consists of about 270 individual bonds, has an average yield to worst of 8.4% and an average modified duration of about 4.3 years.
HYEM will charge an expense ratio of 0.40%, which is below the average for the High Yield Bonds ETFdb Category.
High Yield Bond ETFs
The first several months of 2012 have seen a great deal of innovation in this corner of the ETF market, as a number of issuers have launched products that target high yield bonds issued outside the U.S. Van Eck already offers an International High Yield Bond ETF (IHY) that targets securities from developed and emerging markets, while iShares recently debuted its Emerging Markets High Yield Bond Fund (EMHY). Other products targeting international securities include the Global High Yield Corporate Bond Fund (GHYG) and Global ex-USD High Yield Corporate Bond Fund (HYXU).
HYEM will also focus exclusively on corporate high yield debt; there are no sovereign bonds included in the underlying portfolio (EMHY includes both sovereign and corporate bonds). The underlying index includes only a minor weighting in government guaranteed and local authority bonds.
Disclosure: Long ELD.