HYEM VanEck Emerging Markets High Yield Bond ETF

Van Eck, the quickly growing New York-based ETF issuer, is now closing in on 50 total funds in its line-up thanks to a release of another product in the bond ETF space. The new fund will be the first product to target high yield debt from issuers based in emerging markets in local currencies, allowing investors to further drill down in their fixed income holdings.

The product, the Emerging Markets High Yield Bond ETF (HYEM), looks to charge investors 40 basis points a year in fees while holdings 60 securities in its portfolio. Payments will be made on a monthly basis for dividends, while capital gains will be distributed on a yearly basis (read The Guide To China Bond ETFs).

Although the yield was not yet available for the fund, the index has an average yield to worst of 8.4% and an average coupon of 8.3%. Given these figures and the relatively short duration of the index—the average modified duration is just 4.3 years—HYEM could be a decent source of yield while still keeping interest rate risk low overall.

Holdings Breakdown

In terms of country exposure for the underlying index, China and Russia lead the way, accounting for a combined 24% of assets in the product. Rounding out the top five is Indonesia, Venezuela, and Brazil, while a host of other Latin American, South Asian, and Eastern European countries round out the top 10 (See Go Local With Emerging Market Bond ETFs).

For sectors, ‘industrial’ bonds take up the lion’s share of assets accounting for about two-thirds of the total. Basic industrial firms account for 21% while energy and real estate each make up another 10% as well. Beyond that, banks make up about 18% of exposure in the index, giving the product a decent, but not overwhelming, level of exposure to this slice of the market.

Emerging Market High Yield Bond Market

As investors struggle to find yield in developed markets, the search for payouts usually takes investors to the shores of emerging nations around the world. Generally, this focus has been on investment grade fixed income or sovereign bonds, but this is slowly beginning to change.

As capital markets in emerging nations become more developed, it allows more exotic firms to have access to investors in the fixed income world. In fact, according to Van Eck, the segment has grown by over 265% since 2003 and it now accounts for over 10% of the global high-yield corporate bond market.

Thanks to this impressive growth, the space can now reasonably support exchange-traded funds in a way that only investment grade bond or sovereign bonds were able to just a few years ago (read The Forgotten Municipal Bond ETFs).

In addition to the growing role that these bonds play in the fixed income world, the securities may have some benefits when compared to other, more traditional types of bonds as well. Van Eck states that these high yield securities, on average, payout more than emerging market sovereign bonds or U.S. high yield corporate bonds, furthering their case as a yield destination (see more in the Zacks ETF Center ).

Equally important is that Van Eck has found that emerging market high yield corporates have historically experienced lower default rates than their U.S. counterparts. While this might not make sense initially, one has to consider that only the best companies could obtain access in the junk emerging market bond world while those in the U.S. have had a much easier time finding financing over the years.

Thanks to this, the sample size is much smaller for emerging market bonds while it is often skewed towards higher quality junk securities. This is even reflected in the composition of the index as most bonds, as rated by some of the big agencies, are in the low ‘B’ range with minimal exposure coming in the ‘C’ range or lower.

Emerging Market Bond Competition

In terms of competing products in the emerging market junk ETF space, there is currently only one, the iShares Emerging Markets High Yield Bond Fund (EMHY). This product is also pretty new, having debuted about a month ago to investors.

This ETF tracks the Morningstar Emerging Markets High Yield Bond Index which produces a fund that has about 45 securities in its basket and charges investors 65 basis points a year in fees. Volume is still light at about 4,000 shares a day while the market cap is currently below $20 million (see Three Bond ETFs For A Fixed Income Bear Market).

The focus of this product is on sovereign bonds in the 1-10 year time frame as the product has close to two-thirds of its assets in government securities. However, the product does also have a decent industrial bond component, although it is by no means the majority in the space.

Clearly given EMHY’s focus on sovereign emerging market junk bonds, there is a pretty big distinction between the iShares product and Van Eck’s newly launched fixed income ETF. As a result, there could definitely be a nice niche available for HYEM, especially if rates remain low and investors continue to seek out income producing securities around the globe.

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