HYEM: The Best Choice in Junk Bond ETFs? - ETF News And Commentary
November 07 2012 - 7:01AM
Zacks
Although the Fed’s low rate policy has now gone global, many
investors are still searching for pockets of high yielding
securities in order to boost lagging income levels. While markets
close to home in more exotic segments like MLPs or REITs have been
pretty much tapped out, some in emerging markets still possess more
desirable levels of current income.
That is because while the Fed, and to a lesser extent the ECB,
have kept a lid on rates at home, corresponding levels in emerging
markets are still much higher. While at least part of this is due
to inflation levels, at least a piece is also a result of these
markets’ higher growth rates (see The Five Best ETFs over the Past
Five Years).
For example, benchmark rates in countries like Brazil, India,
and China are well above the 5% threshold, beating out nearly every
developed market out there. This situation helps to keep the yields
relatively high for debt in these countries, while it also boosts
payouts for corporate debt as well.
This is because corporate bonds require a risk premium over
their sovereign debt cousins in order to compensate investors for
the added default risk. Governments can always print more—at least
when debt is denominated in a local currency—so the risk is usually
less for these institutions than their corporate counterparts (see
Forget T-Bonds, Invest in These Top Corporate Bond ETFs).
Fortunately this added risk usually results in a higher payout
to investors which can be especially important in these uncertain
markets. If investors are willing to take it one step further and
truly seek impressive payouts in the developing nation corporate
market, a look to junk bonds could be the way to go.
These securities, which are below investment grade in more risky
nations, can potentially have yields that crush their developed
market or non-junk counterparts. Furthermore, while the strategy
may sound risky, an ETF approach that holds dozens of different
bonds from around the world should help to reduce company and
country specific risk in case any one firm falters (See Three ETFs
with Incredible Diversification).
A junk emerging market corporate bond ETF can also offer up some
impressive diversification benefits too, as many firms in this
segment are unlikely to be found in a number of other total market
bond ETFs or similar fixed income products. For these reasons,
investors could consider the emerging market junk bond ETF detailed
below for a new way to potentially achieve yield in today’s
uncertain low rate environment:
Market Vectors Emerging Markets High Yield Bond ETF
(HYEM)
This relatively new ETF tracks the BofA Merrill Lynch High Yield
US Emerging Markets Liquid Corporate Plus Index, a benchmark of
junk-rated emerging market bonds that are dollar denominated. The
security focuses in on bonds at the high end of the junk spectrum
as just 2.9% are rated ‘CCC’ while 50% are rated ‘BB’ (read Top
Four High Yield Bond ETFs).
It should also be noted that the product hones in on low
duration securities as bonds that mature in 10 years or less make
up the vast majority of the index. This should help to reduce the
interest rate risk of the fund overall, although it could cut into
the overall yield of the product.
In terms of sectors, basic industry bonds make up roughly 21%,
followed closely by banking (15.8%), energy (13.5%), and real
estate (12.8%). Nationally, the product is exposed to Chinese and
Russian bonds with nearly 30% of the portfolio, while Venezuela,
Brazil, and Indonesia round out the top five with roughly 8%
each.
While the product is quite diversified, the real promise of the
fund comes in its yield, which in 30 Day SEC terms is nearly 6.6%.
Meanwhile, fees are also relatively low at 40 basis points a year
so the total payout is quite high for this ETF (read Three
Overlooked High Yield ETFs).
If that wasn’t enough, this junk corporate bond ETF has also
beat out similar ETFs that have a U.S. focus as well. JNK and HYG,
two of the most popular ETFs in the junk bond segment, are both
trailing HYEM since inception by roughly 3% in terms of price
appreciation while they also yield less by about 100 basis points
as well.
So even though the space is relatively new and overlooked by
many investors, it is capable of being a better choice in the high
yield bond ETF market. Not only has performance been better, but
yields have been more robust as well, suggesting that for investors
who can overlook the low volume and modest bid ask spreads, HYEM
could be an interesting addition to a portfolio starved for
yield.
|
HYEM
|
Holdings
|
106
|
Biggest Nations
|
China/Russia (about 14% each)
|
Yield
|
6.6%
|
Expense Ratio
|
0.40%
|
AUM
|
$21.0 million
|
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MKT VEC-EM HYB (HYEM): ETF Research Reports
ISHARS-IBX HYCB (HYG): ETF Research Reports
SPDR-BC HY BD (JNK): ETF Research Reports
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