Invest Like the Rich -- and Get Yields up to 7%

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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 ( GDP ) 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%, respectively. 

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 ( ETFs ). 

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 High-Yield International , says investors should to look overseas if they want to truly find high yields.

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 of valuation…

1. Market Vectors Emerging Markets High-Yield Bond ( HYEM )
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 ( HYG ) and the SPDR Barclays Capital High-YieldJunk Bond ( JNK ) , 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: EMHY)
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)
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 your portfolio.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.


This article appears in: Investing , ETFs

Referenced Stocks: GDP , HYEM , HYG , JNK

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