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VanEck's Intriguing High-Yield Bond Opportunity

ETF Professor

Like equity investors, fixed-income investors typically favor assets in their home markets, and that holds true with high-yield corporate debt and the related exchange traded funds.

Yet some international bond funds offer investors opportunities for increased diversification and higher income profiles.

What Happened

While many traditional aggregate bond indexes and ETFs can include some exposure to investment-grade emerging markets debt, those funds' exposure to developing economies is typically light. The VanEck Vectors Emerging Markets Aggregate Bond ETF (NYSE: EMAG) can help investors fill in some emerging markets fixed-income gaps.

The fund tracks the MVIS EM Aggregate Bond Index (MVEMAG), “which is comprised of sovereign bonds and corporate bonds denominated in U.S. dollars, euros or local emerging markets currencies, and includes both investment grade and below investment grade-rated securities,” according to VanEck.

Why It's Important

While the bulk of EMAG's holdings are sovereign debt (almost 62 percent), the fund features some corporate holdings as well.

“Investors that include emerging markets corporate bonds within their fixed-income portfolio may gain exposure to favorable long-term growth trends in emerging markets,” VanEck said in a recent note.

“They may also potentially earn attractive yields and add diversification to a corporate bond portfolio. From a portfolio construction perspective, we believe that focusing on the high-yield segment of this market may be a better option compared to a broad exposure that includes both investment grade and high-yield securities.”

Nearly 63 percent of EMAG's 290 holdings have investment-grade ratings compared to just 26 percent with junk ratings. Still, EMAG's non-investment grade exposure is important.

“From a diversification standpoint, this is reflected in a lower correlation to U.S. investment grade corporate bonds and to core bonds versus broad emerging markets corporate bonds,” said VanEck. “Further, using emerging markets high-yield bonds rather than an all-rating exposure provided a higher yield, with less interest rate risk.”

What's Next

EMAG has a 30-day SEC yield of 4.73 percent, or more than 170 basis points above the comparable yield on the Bloomberg Barclays U.S. Aggregate Index.

Mexico, Brazil and Indonesia are EMAG's largest geographic exposures, combining for about a quarter of the fund's weight.

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