iShares introduced a pair of new ETFs this week that offer exposure to junk bonds from issuers outside the U.S., opening a new segment of the global fixed income market that had previously been difficult to access. The two new funds include a product that targets junk bonds from emerging markets as well as a global ex-U.S. product that includes both developed and emerging market exposure:
Under The Hood: EMHY
EMHY will seek to replicate the Morningstar Emerging Markets High Yield Bond Index, a benchmark that consists of dollar-denominated bonds issued by companies in emerging markets that are below investment grade. The underlying index consists of about 170 individual securities and has an effective duration of about six years. The yield to maturity for the index is about 7.3%.
From a country perspective, the breakdown of EMHY may be a bit surprising. Venezuela is the largest individual component at about 19%, followed by Turkey (15%), the Philippines (12%), and Russia (7%). Other countries represented in EMHY include Lebanon, Ukraine, the UAE, Brazil, Hungary, and Mexico. The BRIC bloc of emerging markets accounts for about 15% of the entire portfolio, and there are more than two dozen different market represented in total.
EMHY becomes the first ETF to focus specifically on junk bonds from emerging markets issuers, joining a number of existing products that cast slightly wider nets. WisdomTree recently debuted the first emerging markets corporate bond fund (EMCB); that ETF includes primarily investment grade debt from issuers in a number of different emerging markets.
Under The Hood: HYXU
HYXU will seek to replicate the Markit iBoxx Global Developed Markets ex-U.S. High Yield Index, a benchmark that consists of below investment grade debt from issuers in developed markets. Unlike EMHY, this ETF will hold debt that is denominated in currencies besides the U.S. dollar. About 81% of the portfolio is denominated in euros, with 11% in the pound sterling and 8% in the Canadian dollar.
Again, the country breakdown doesn't necessarily include the usual suspects: Luxembourg takes the top spot at about 16%, followed by the Netherlands (15%), France (15%), and Germany (11%). There is a definite tilt towards Europe in the portfolio of HYXU; besides Canada, all the component countries are in Western Europe. That means that developed Asian economies such as Japan and Australia aren't included in this ETF.
The index underlying HYXU has a yield to maturity of about 8.1% and an effective duration of just under four years. So despite a lower duration, Europe-focused HYXU actually has a higher yield than EMHY. That highlights an interesting reality of the current economic environment; debt of companies in Western Europe commands a higher rate of return than generally similar debt of issuers based in emerging markets.
HYXU will charge an expense ratio of 0.40%.
iShares Bond ETF Innovation
EMHY and HYXU are the latest in a long line of innovative fixed income products to debut from iShares in 2012; the largest issuer in the industry has been extremely active on the product development front. Among the new additions to the ETF lineup are the first sector-specific corporate bond ETFs, as well as the first ETF to focus specifically on the highest rated corporate bonds. Fixed income ETFs launched by iShares in recent months include:
- Aaa - A Rated Corporate Bond Fund (QLTA)
- Barclays CMBS Bond Fund (CMBS)
- Barclays GNMA Bond Fund (GNMA)
- Financials Sector Bond Fund (ENGN)
- Industrials Sector Bond Fund (AMPS)
Disclosure: No positions at time of writing.
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