HYEM ETF: Question and Answer
July 08, 2024
Read Time 6 MIN
High yield (HY) emerging markets (EM) corporate bonds are a compelling investment opportunity that is often overlooked in a broader strategic asset allocation. In this Q&A, we explore the size, composition and advantages of the EM high yield corporate bond market. We also provide insights into the risk profile of the asset class, performance drivers, and accessing exposure with the VanEck Emerging Markets High Yield Bond ETF (HYEM).
- What is the size and composition of the high yield EM corporate bond market?
- Why invest in high yield EM corporates?
- What is the credit quality profile of EM high yield corporates?
- What are the major risk/performance drivers of high yield EM corporate bonds?
- How do high yield EM corporates fit within a portfolio?
- How can investors access high yield emerging markets corporate bonds?
- How can investors buy VanEck ETFs?
What is the size and composition of the high yield EM corporate bond market?
The global high yield space has a market value of approximately $1.4 trillion, of which emerging markets issuers make up about 17%. The ICE BofA Diversified High Yield US Emerging Markets Corporate Plus Index tracks EM HY corporate bonds issued by companies across 48 countries and 20 sectors. Sector exposures within the EM HY corporate bond universe are shown below.
High Yield EM Breakdown by Sector
| Sector | Weight (%) |
| Energy | 19.9 |
| Banking | 14.1 |
| Basic Industry | 13.0 |
| Utility | 8.3 |
| Transportation | 5.7 |
| Real Estate | 5.2 |
| Leisure | 5.1 |
| Local-Authority | 4.6 |
| Telecommunications | 4.0 |
| Financial Services | 3.6 |
Source: ICE Data Indices as of 5/31/2024.
Why invest in high yield EM corporates?
Investing in high yield EM corporates can provide several benefits within a broader high yield portfolio, including yield pickup, higher quality and diversification benefits. A yield comparison versus other fixed income asset classes is shown below.
Higher Yields Than US, Global and Other EM Fixed Income
Source: ICE Data Indices, LLC and J.P. Morgan as of 3/31/2024. EM High Yield Corp: ICE BofA Diversified High Yield US Emerging Markets Corporate Plus Index; Local Currency EM Sovereign: J.P. Morgan GBI-EM Global Diversified; USD EM Sovereign: J.P. Morgan EMBI Global Diversified; U.S. High Yield Corp: ICE BofA U.S. High Yield Index; US IG Corp: ICE BofA Corporate Bonds Index; US Agg: ICE BofA US Broad Market Index; Global Agg: ICE BofA Global Broad Market Index. Yield to Worst measures the lowest of either yield.
Emerging markets companies generally must pay higher yields compared to developed markets corporates to compensate investors for the risks associated with investing in emerging markets. However, some of this perceived risk is related to a “stigma” that EM issuers must overcome, rather than a riskier credit profile. For example, even at the same rating level, EM issuers generally pay a premium. Further, compared to U.S. HY bond issuers, EM HY corporate bonds have a higher tilt to BB rated bonds and conversely, a lower exposure to single B and CCC issuers. In addition, high yield EM issuers have historically exhibited lower levels of leverage (given their higher spreads), which translates to a higher spread per unit of leverage. In other words, high yield EM corporate bond investors are being paid more to take less risk compared to U.S. high yield bond investors.
High Yield EM Bonds Offer Attractive Compensation for Risk
Source: BofA Research, as of 12/31/2023. EM HY is represented by ICE BofA High Yield US Emerging Markets Liquid Corporate Plus Index; US HY is represented by ICE BofA US High Yield Index.
Adding EM high yield corporate bond exposure can therefore allow investors to generate higher yields without taking on additional credit risk compared to a more U.S. focused high yield allocation.
What is the credit quality profile of EM high yield corporates?
The overall credit quality of the bonds held in the HY EM corporate bond index is higher than that of U.S. HY bonds (as represented by the ICE BofA U.S. High Yield Index), with a higher weighting to BB rated bonds and a lower weighting to single B and below rated bonds. EM high yield corporate bonds have historically exhibited a similar annual average default rate versus U.S. HY corporate bonds (note: the relatively high default rate in 2022 was primarily due to Russian issuers and companies in the Chinese property sector).
Emerging Markets HY Bonds Tilt to Higher Quality
Source: FactSet and ICE Data Indices, LLC as of 5/31/2024. EM High Yield Corp Bonds: ICE BofA Diversified High Yield US Emerging Markets Corporate Plus Index; U.S. High Yield Corporate Bonds: ICE BofA U.S. High Yield Index. Yield to Worst measures the lowest of either yield
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What are the major risk/performance drivers of high yield EM corporate bonds?
High yields (due to significant credit spreads, i.e., the differential between HY EM bonds and risk-free benchmarks such as U.S. treasuries) are the primary return contributor for HY EM corporate bonds. Investors benefit from the high level of interest that can be earned by holding these bonds. However, movements in spreads can introduce price volatility. Although investors benefit from a decline in credit spreads, which may reflect lower perceived risk implied by market pricing, bond prices will decline if spreads widen. In periods of stress, high yield credit spreads can widen significantly.
In addition to credit spreads, the direction of U.S. interest rates will also impact returns because the bonds are denominated in U.S. dollars. A decline in interest rates results in higher bond prices, increasing total returns, while an increase in U.S. interest rates will detract from total return. Investing in EM corporates also involves unique risk drivers, such as political instability in emerging markets, which can lead to changes in economic policies and regulatory environments that impact corporate profits. HY EM corporate issuers may also have currency risk, as fluctuations in their local currency against the U.S. dollar can affect their ability to repay debt. Additionally, EM corporates often operate in less mature and less transparent markets, which can increase both credit and liquidity risks.
How do high yield EM corporates fit within a portfolio?
An allocation to high yield EM corporates can allow investors to build a higher-yielding, more complete global high yield portfolio that provides exposure to emerging markets growth opportunities. High yield emerging markets corporate bonds are not represented in U.S. high yield bond benchmarks, which creates significant diversification potential. Second, HY EM corporates allow investors to capitalize on the growth potential within EM, as many of these countries have shown higher growth rates than developed markets. EM corporates that derive most of their revenue in these higher growth countries may potentially benefit from higher corporate earnings and improved fundamentals. Moreover, HY EM corporates can serve as a complement to EM equities, offering potentially lower volatility and a different risk-return profile. Alongside an EM equity allocation, EM corporate bond exposure can allow investors to capture EM growth opportunities, while generating attractive income and lowering the volatility of an overall EM allocation.
| 10Y Risk/Return Characteristics | ||||
| Return (%) | St Dev | Max Drawdown | Sharpe Ratio | |
| ICE Div HY EM Corp + | 3.3 | 9.5 | -26.3 | 0.23 |
| MSCI EM | 2.7 | 17.2 | -36.0 | 0.15 |
Source: Morningstar as of 5/31/2024. EM HY Corp is represented by ICE BofA Diversified High Yield US Emerging Markets Corporate Plus Index; EM Equities is represented by MSCI Emerging Markets Index.
HYEM | VanEck Emerging Markets High Yield Bond ETF
How can investors access high yield emerging markets corporate bonds?
The VanEck Emerging Markets High Yield Bond ETF (HYEM®) seeks to replicate the price and yield performance of the ICE BofA Diversified High Yield US Emerging Markets Corporate Plus Index (EMLH), which consists of U.S. dollar-denominated bonds issued by non-sovereign emerging markets issuers that are rated below investment grade and that are issued in the major domestic and Eurobond markets.
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IMPORTANT DISCLOSURES
ICE BofA Diversified High Yield US Emerging Markets Corporate Plus Index: is comprised of U.S. dollar-denominated bonds issued by non-sovereign emerging markets issuers that are rated below investment grade and that are issued in the major domestic and Eurobond markets.
J.P. Morgan GBI-EM Global Diversified Index: tracks emerging markets local government bonds that are accessible by most foreign investors.
J.P. Morgan EMBI Global Diversified Index: tracks USD-denominated emerging markets sovereign bonds.
ICE BofA U.S. High Yield Index: is comprised of below-investment grade corporate bonds (based on an average of Moody’s, S&P and Fitch) denominated in U.S. dollars. The country of risk of qualifying issuers must be an FX-G10 member, a Western European nation, or a territory of the U.S. or a Western European nation.
ICE BofA Corporate Bonds Index: tracks the performance of US dollar denominated investment grade rated corporate debt publicly issued in the US domestic market.
ICE BofA US Broad Market Index:tracks the performance of US dollar denominated investment grade debt publicly issued in the US domestic market, including US Treasury, quasi-government, corporate, securitized and collateralized securities.
ICE BofA Global Broad Market Index: tracks the performance of investment grade debt publicly issued in the major domestic and eurobond markets, including sovereign, quasi-government, corporate, securitized and collateralized securities.
MSCI Emerging Markets Index: is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
An investment in the Fund may be subject to risks which include, among others, high yield securities, investing in European, Asian, Latin American, Brazilian, and foreign securities, emerging market issuers, foreign currency, credit, interest rate, restricted securities, financials sector, market, operational, call, sampling, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares and index-related concentration risks, all of which may adversely affect the Fund. Emerging market issuers and foreign securities may be subject to securities markets, political and economic, investment and repatriation restrictions, different rules and regulations, less publicly available financial information, foreign currency and exchange rates, operational and settlement, and corporate and securities laws risks.
ICE Data Indices, LLC and its affiliates (“ICE Data”) indices and related information, the name "ICE Data", and related trademarks, are intellectual property licensed from ICE Data, and may not be copied, used, or distributed without ICE Data's prior written approval. The licensee's products have not been passed on as to their legality or suitability, and are not regulated, issued, endorsed, sold, guaranteed, or promoted by ICE Data. ICE Data MAKES NO WARRANTIES AND BEARS NO LIABILITY WITH RESPECT TO THE INDICES, ANY RELATED INFORMATION, ITS TRADEMARKS, OR THE PRODUCT(S) (INCLUDING WITHOUT LIMITATION, THEIR QUALITY, ACCURACY, SUITABILITY AND/OR COMPLETENESS).
Index returns are not Fund returns and do not reflect any management fees or brokerage expenses. Certain indices may take into account withholding taxes. Investors can not invest directly in the Index. Returns for actual Fund investors may differ from what is shown because of differences in timing, the amount invested and fees and expenses. Index returns assume that dividends have been reinvested.
The performance data quoted represents past performance. Past performance is not a guarantee of future results. Performance information for the Fund reflects temporary waivers of expenses and/or fees. Had the Fund incurred all expenses, investment returns would have been reduced. Investment return and value of the shares of the Fund will fluctuate so that an investor's shares, when sold, may be worth more or less than their original cost. Performance may be lower or higher than performance data quoted. Fund returns reflect dividends and capital gains distributions. Performance current to the most recent month end is available by calling 800.826.2333.
Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus , which contains this and other information, call 800.826.2333 or visit vaneck.com/etfs . Please read the prospectus and summary prospectus carefully before investing.
This content is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this content. Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.
VanEck mutual funds and ETFs are distributed by Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
666 Third Avenue | New York, NY 10017
© 2024 VanEck. VanEck®, VanEck Access the opportunities®, and the stylized VanEck design® are trademarks of Van Eck Associates Corporation.
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IMPORTANT DISCLOSURES
ICE BofA Diversified High Yield US Emerging Markets Corporate Plus Index: is comprised of U.S. dollar-denominated bonds issued by non-sovereign emerging markets issuers that are rated below investment grade and that are issued in the major domestic and Eurobond markets.
J.P. Morgan GBI-EM Global Diversified Index: tracks emerging markets local government bonds that are accessible by most foreign investors.
J.P. Morgan EMBI Global Diversified Index: tracks USD-denominated emerging markets sovereign bonds.
ICE BofA U.S. High Yield Index: is comprised of below-investment grade corporate bonds (based on an average of Moody’s, S&P and Fitch) denominated in U.S. dollars. The country of risk of qualifying issuers must be an FX-G10 member, a Western European nation, or a territory of the U.S. or a Western European nation.
ICE BofA Corporate Bonds Index: tracks the performance of US dollar denominated investment grade rated corporate debt publicly issued in the US domestic market.
ICE BofA US Broad Market Index:tracks the performance of US dollar denominated investment grade debt publicly issued in the US domestic market, including US Treasury, quasi-government, corporate, securitized and collateralized securities.
ICE BofA Global Broad Market Index: tracks the performance of investment grade debt publicly issued in the major domestic and eurobond markets, including sovereign, quasi-government, corporate, securitized and collateralized securities.
MSCI Emerging Markets Index: is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
An investment in the Fund may be subject to risks which include, among others, high yield securities, investing in European, Asian, Latin American, Brazilian, and foreign securities, emerging market issuers, foreign currency, credit, interest rate, restricted securities, financials sector, market, operational, call, sampling, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares and index-related concentration risks, all of which may adversely affect the Fund. Emerging market issuers and foreign securities may be subject to securities markets, political and economic, investment and repatriation restrictions, different rules and regulations, less publicly available financial information, foreign currency and exchange rates, operational and settlement, and corporate and securities laws risks.
ICE Data Indices, LLC and its affiliates (“ICE Data”) indices and related information, the name "ICE Data", and related trademarks, are intellectual property licensed from ICE Data, and may not be copied, used, or distributed without ICE Data's prior written approval. The licensee's products have not been passed on as to their legality or suitability, and are not regulated, issued, endorsed, sold, guaranteed, or promoted by ICE Data. ICE Data MAKES NO WARRANTIES AND BEARS NO LIABILITY WITH RESPECT TO THE INDICES, ANY RELATED INFORMATION, ITS TRADEMARKS, OR THE PRODUCT(S) (INCLUDING WITHOUT LIMITATION, THEIR QUALITY, ACCURACY, SUITABILITY AND/OR COMPLETENESS).
Index returns are not Fund returns and do not reflect any management fees or brokerage expenses. Certain indices may take into account withholding taxes. Investors can not invest directly in the Index. Returns for actual Fund investors may differ from what is shown because of differences in timing, the amount invested and fees and expenses. Index returns assume that dividends have been reinvested.
The performance data quoted represents past performance. Past performance is not a guarantee of future results. Performance information for the Fund reflects temporary waivers of expenses and/or fees. Had the Fund incurred all expenses, investment returns would have been reduced. Investment return and value of the shares of the Fund will fluctuate so that an investor's shares, when sold, may be worth more or less than their original cost. Performance may be lower or higher than performance data quoted. Fund returns reflect dividends and capital gains distributions. Performance current to the most recent month end is available by calling 800.826.2333.
Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus , which contains this and other information, call 800.826.2333 or visit vaneck.com/etfs . Please read the prospectus and summary prospectus carefully before investing.
This content is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this content. Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.
VanEck mutual funds and ETFs are distributed by Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
666 Third Avenue | New York, NY 10017
© 2024 VanEck. VanEck®, VanEck Access the opportunities®, and the stylized VanEck design® are trademarks of Van Eck Associates Corporation.