Emerging markets have experienced staggering growth in the past
10 years. And even though growth rates have recently slowed due to
weakness in the globaleconomy , they are still expanding at a much
faster pace than developed countries like the United States, the
United Kingdom and Japan.
Take Brazil for example. Even though a recent third-quartergross
domestic product (
) growth of 0.6% was below expectations, it is still projecting a
4% growth in 2013. That's well ahead of the United States, which is
projected to grow by a paltry 2% and far better than the 1.4% total
global growth projected by the Organisation for Economic
Co-operation and Development.
Other emerging markets are also expected to see big gains.
South Korea is expected to growGDP to at least 3% in 2013, while
the United Arab Emirates is expected to grow its economy to 4.6%
next year. Russia, India and China are projected to
reach GDP growth of 3.9%, 6.5% and 8%,
But even though emerging-market growth isn't exactly a new thing
on the Street, the way I like to invest in these countries is. In
fact, my favoriteinvestments were only available exclusively to
professional and high net-worth investors just a year ago.
I'm talking about high-yielding emerging-market corporatebonds ,
which can now be obtained through exchange-traded funds (
With high yields of up to 7%, emerging-market corporate bonds
are way ahead of U.S. corporatebond yields of about 3.8% and more
than three times theyield of the 10-yearTreasury note of 1.7%.
These ETFs provide investors with exposure to growing companies in
emerging markets that have lower credit ratings and leveraged
balance sheets. This means these companies are more susceptible to
default on their loans, so their borrowing costs are high (hence
their higher yields). But as these companies evolve through the
natural stages of growth, their borrowing costs decline, producing
big capital gains for early investors.
This translates into two things: a shot at some serious capital
gains and huge yields. This is why StreetAuthority Co-Founder Paul
Tracy, the face behind
, says investors should to look overseas if they want to truly find
But it's important to note that higher yield also comes with
more risk, so the great thing about bond ETFs is that,
because they hold a basket of bonds, they provide
investors with ahedge against single-asset risk.
Here are my three favorite
high-yielding emerging-market ETFs. All three of them
were launched this year, making them a bit more attractive in terms
1. Market Vectors Emerging Markets High-Yield Bond (
ThisETF corresponds to the price and yield of the BofA Merrill
Lynch High-Yield US Emerging MarketsLiquid Corporate PlusIndex , an
index of high-yield corporate bonds from emerging markets. With a
healthy 7% yield, this ETF has a higher yield than domestic
high-yieldcorporate bond ETFs such as the
iShares iBoxx $ High Yield Corporate Bond (
SPDR Barclays Capital High-YieldJunk Bond (
, both yielding about 6.8%. HYEM's yield also beats sovereign
emerging-market yields of roughly 4%.
With top 10 holdings that include exposure to companies in the
Cayman Islands, Indonesia, Brazil and Mexico, this bond ETF
provides diversified exposure to exotic locations that, until June,
were unavailable to regular investors. Because it was just
launched, daily liquidity of 15,500shares and assets under
management of just $21 million make this a satellite holding in
your portfolio. But with anexpense ratio of just 0.40% below the
category average of 0.52%, this is the perfect place
forfixed-income investors to tap into growth and yield with a
little value to boot.
2. iShares Emerging Markets High Yield Bond (NYSE:
This ETF is a step down in risk from HYEM, mixing 60%sovereign debt
with 40% high-yield corporate debt. In spite of less risk,
investors are still rewarded with a solid 4.5% yield that handily
beats the 10-year Treasury note as well as investment-grade
corporate bonds in the United States, which yield about 3.5%.
This is a new ETF as well, hitting the New York Stock Exchange
in April. But in just six months, the average daily tradingvolume
has risen to 27,000, while assets under management have jumped to
$180 million. Fees of 0.65% are higher than the category average of
0.52%, but with limited choices in this space, only a few options
are less expensive.
3. iShares Emerging Markets Corporate Bond (BATS:
CEMB corresponds to the Morningstar Emerging Markets Corporate Bond
Index. This index tracks a portfolio of bonds with an average
credit quality of "BB" and offers diverse geographic exposure with
South Korea, Brazil and India in the top 10 country holdings. After
launching in April, this ETF is still growing in popularity, with
average daily volume of just 6,000 contracts and total assets under
management of $21 million. An expense ratio of 0.60% makes it the
most expensive ETF of the three, but as more investors catch on to
the potential of emerging-market high-yield corporate bonds, this
ratio is bound to fall. This ETF boasts a healthy 3.5% yield.
Risks to Consider:
High-yield corporate bonds are companies with lower credit
ratings and leveraged balance sheets. Thisleverage is a greatasset
in a strong economy, but can create liquidity or evensolvency
issues when economic growth slows. These ETFs also have relatively
low trading volume and assets under management, making it easier
for big shareholders to affect themarket .
Action to Take -->
Emerging markets are still in the early stages of a long-term
growth cycle. So buying high-yield corporate bonds from emerging
markets enables investors to lock in an outsized yield with the
opportunity to enjoy big capital gains in the long run. Any of
these three high-yield emerging-market bond ETFs are an awesome
combination of growth and income that are worthy of a place in
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