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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