Van Eck Adds Emerging Corporate Junk ETF

May 09, 2012

Van Eck adds another yield-generating ETF, this one focused on emerging market corporate junk bonds.

Van Eck Global, the New York-based fund manager behind the Market Vectors ETFs, today rolled out another high-yield bond ETF—its third in a month—this one tapping exclusively into high-yielding emerging markets corporate debt.

The Market Vectors Emerging Markets High Yield Bond ETF (NYSEArca: HYEM) tracks the BofA Merrill Lynch High Yield US Emerging Markets Liquid Corporate Plus Index, which comprises more than 260 below-investment-grade corporate securities. The dollar-denominated portfolio has a net expense ratio of 0.40 percent.

The fund comes on the heels of Van Eck’s broader strategy, the Market Vectors International High Yield Bond ETF (NYSEArca: IHY), launched in April, but IHY blends exposure to emerging and developed markets corporate junk bonds. Van Eck also rolled out a U.S.-centered junk bond fund last month, its Fallen Angel High Yield Bond ETF (NYSEArca: ANGL).

Van Eck, like many other ETF sponsors, has been racing to meet investor demand for income-generating opportunities at a time when much of the developed world is faced with an economic environment marked by ultra-low interest rates and volatile equity markets.

That appetite for yield has asset managers turning their attention to largely untapped segments of the fixed-income space such as international corporate debt, which, generally speaking, looms large, as companies increasingly turn to debt issuance as a substitute for bank lending as a result of tighter credit since the markets collapsed in 2008.

That debt is particularly prospective in emerging markets because the region is projected to grow at a faster pace than developed economies. But up to now, investors looking to tap into emerging market corporate debt had few tools to do so.

The WisdomTree Emerging Markets Corporate Bond ETF (NYSEArca: EMCB) and the iShares Emerging Markets Corporate Bond Fund (NYSEArca: CEMB)—neither of which includes junk bonds—have just come to market this spring. EMCB has already gathered $60 million, while CEMB has $10 million in assets.

HYEM serves up access to a segment that offers higher yields and lower default rates than similar U.S.-issued debt, according to Van Eck. The fund hones in on emerging market junk debt from companies that might be better positioned for growth relative to U.S. names.

Risk Profile

HYEM’s portfolio consists of dollar-denominated bonds whose yields not only exceed that of their sovereign counterparts in emerging markets, but also that of similar U.S.-issued junk corporate debt, according to information provided by Van Eck. The bonds also show lower default rates than similar U.S. bonds.

At launch, the fund included a representative sample of its underlying index of about 60 bonds, with nearly 60 percent of them being BB-rated. The mix should deliver a yield to worst of nearly 8.4 percent, Van Eck executives said in a conference call.

The fund screens issuers by risk exposure, and it excludes issuers who have risk exposure to the largest currencies in the world. Those include Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the U.K. and the U.S., as well as all western European countries, Van Eck said. Its biggest country allocation is China, which represents 12 percent of the portfolio, but the fund taps into as many as 31 countries.

HYEM also requires that the bonds meet a minimum notional size of $300 million.


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