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Van Eck notched yet another first for the ETF industry today with the launch of a product designed to deliver exposure to high yielding bonds from international issuers. The Market Vectors International High Yield Bond ETF (NYSEARCA:IHY) will seek to replicate an index comprised of below investment grade debt from issuers in both emerging and developed markets outside the U.S. The index underlying IHY will include bonds denominated in U.S. dollars, Euros, Canadian dollars, and pound sterling.

Under The Hood

The related BofA Merrill Lynch Global ex-U.S. Issuers High Yield Constrained Index has an average yield to worst of about 8.3% with an average modified duration of about four years. About 1,000 individual securities make up the index, spread across a number of different industries and countries. Industrials bonds make up close to 75% of the underlying index, though that total includes companies engaged in a number of different industries such as automotive, energy, media, health care, and real estate. Financial issuers make up about 20% of the underlying portfolio.

Roughly 55% of the portfolio is allocated to securities denominated in the U.S. dollar; the remainder is split between the euro (38%), pound (5%), and Canadian dollar (2%). About two thirds of the underlying index is allocated to developed markets, with another third in emerging markets [see the IHY fact sheet].

Case For High Yield International Bonds

The obvious appeal of IHY is as a potential source of attractive current returns; with yields on domestic investment grade debt at record lows, many investors are looking overseas or towards lower quality debt to beef up returns. IHY combines both of those elements in a single ticker, holding below investment grade debt from international issuers.

IHY also offers a way to tap into an asset class that is often overlooked, potentially expanding the depth of investor portfolios and bringing diversification benefits as well. Most U.S.-based investors with exposure to high yield bonds focus only on debt of U.S. issuers, overlooking an increasingly large portion of the global high yield debt market in the process. International issuers now represent about 35% of global junk bonds, a percentage that has steadily climbed over the last several years.

There are about now about a dozen ETFs in the High Yield Bonds ETFdb Category, with aggregate assets of close to $30 billion. The vast majority of those assets are in U.S. dollar-denominated securities-it has historically been difficult for investors to access below investment grade debt from international issuers. The PowerShares International Corporate Bond Portfolio (NYSEARCA:PICB) and SPDR Barclays Capital International Corporate Bond ETF (NYSEARCA:IBND) offer access to international corporate bonds, but both focus primarily on higher quality corporate debt in developed markets.

International junk bonds also offer an opportunity to beef up current returns without taking on significantly more risk; international high yield debt currently offers higher yields and lower duration than U.S. bonds with similar credit ratings. Moreover, high yield bonds denominated in currencies besides the greenback bring some dollar diversification to U.S.-based investors.

"In today's persistent low interest environment, investors continue to search the globe for new sources of income," said Francis Rodilosso, one of the portfolio managers for IHY. "With IHY, we have created an income-oriented ETF that, by tracking its index, may offer high-yield diversification, a high level of potential income and exposure to issuers worldwide that may experience more robust economic growth than the United States."

Disclosure: No positions at time of writing.

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Source: High Yield International Bond ETF Debuts