Top 10 High Yield And Emerging Market Bond ETFs

Includes: HSY, HYG
by: David Fry

With yields low, investors seeking income are tempted to seek yield in other sectors where real rates of return after inflation can be found. Higher yields have traditionally been found in so-called High Yield (Junk) bonds with greater historical returns - also from Emerging Market Debt.

With High Yield bonds a unique condition occurred after the bottom of the 2008 bear market in equities. Companies once considered investment grade, particularly in the financial sector, suddenly fell into the high yield category. As many of these companies were bailed-out or subsidized by the government the sector became more attractive to opportunistic investors. Demand for yield and return of capital also stimulated investors no longer as interested in equities due to previous heavy losses. Further, demographics with an aging baby boomer population also fed the demand for both yield and perceived safety.

Why junk then?

The momentum as investors switched from equities to bonds was strong and when combined with the dissatisfaction with low yields from more credit worthy sectors benefitted junk. Investors have rationalized greater safety in government subsidies and support than credit ratings would indicate to gain more yield.

Emerging markets offered new opportunities as well. With growth from these economies in high gear opinions regarding their debt improved correspondingly. With demand for yield high this allowed investors to rationalize investments in these sectors.

Nevertheless, High Yield and Emerging Market Bonds have historically traded at certain "spreads" to higher rated debt. These spreads given the historically unique factor of nearly zero interest rate policies in the U.S., the unique circumstances cited within the High Yield sector and economic growth in Emerging Markets seem to have tightened spread differentials to the naked eye. But, in actuality these spreads remain within traditional ranges.

One risk factor not cited often enough is junk bonds often trade with or correlated to the overall stock market. In other words, junk bonds can trade like stocks. Further if economic conditions reflect contraction then junk bonds face greater risk as the ability to service debt becomes challenging. Should the contraction worsen companies can fail. At the opposite extreme is higher interest rates should and when they occur would also challenge corporations dependent on high yield debt to avoid failure. This has happened in the past but perhaps beyond current memories in 1994 for example.

We feature a technical view of conditions from monthly chart views. Simplistically, we recommend longer-term investors stay on the right side of the 12 month simple moving average. When prices are above the moving average, stay long, and when below remain in cash or short. Some more interested in a fundamental approach may not care so much about technical issues preferring instead to buy when prices are perceived as low and sell for other reasons when high; but, this is not our approach.

Premium members to the ETF Digest receive added signals when markets become extended such as DeMark triggers to exit overbought/oversold conditions.

In U.S. high yield two issues remain overwhelmingly dominant-HYG and JNK. The rest are interesting in the second tier.

#10: Wisdom Tree Asia Local Debt ETF (ALD)

ALD is another offering from Wisdom Tree not tied to a particular index. Clearly the focus is on Asian market debt (ex-Japan) with the idea to capture both yield and perhaps even enhanced return from local currency appreciation. This, of course, is a door that swings both ways. The fund was launched in March of 2011.

The expense ratio is 0.55%. AUM equal $408.7M with average daily trading volume of 55K shares. Asset quality is quite mixed with 43% AAA and 43% Non-rated. Some of this is due to the unique nature of using forward contracts to buy securities. The average duration of the fund is between 2-7 years.

The holdings data below are approximate and due to high portfolio turnover and use of forward contract rollover making analysis more difficult. As of April 30, 2012 the SEC dividend yield was 1.16%. The YTD return was 3.51%. The 1 YR return was 0.15%. ALD trades commission free at E*Trade.

Data as of April 30, 2012

ALD Top Ten Holdings & Weightings

  • Indonesia(Rep Of) 7.375%: 4.38%
  • Korea(Republic Of) 4.5%: 3.96%
  • Malaysia 4.012%: 3.80%
  • Korea(Republic Of) 3.75%: 3.79%
  • Philippines Rep 4.95%: 3.75%
  • Malaysia 3.21%: 3.40%
  • Korea(Republic Of) 4%: 3.07%
  • Thailand(Kingdom) 5.25%: 2.98%
  • Thailand(Kingdom) 5.25%: 2.88%
  • Australia 6.25%: 2.84%

#9: Wisdom Tree Emerging Markets Local Debt Fund (ELD)

ELD doesn't seem to be following an established index that we can tell. It's based on local currency issues from a variety of emerging market countries. If there's pressure on the US dollar then perhaps some country currencies will outperform adding more to returns. Naturally the opposite can be the case.

The fund was launched in September 2010. ELD has an expense ratio of 0.55%, AUM equal nearly $1.256M and average daily trading volume of 274K shares. The credit quality is quite mixed with most assets greater than BBB which is unique for the category.

The average duration is less than 10 years while the average yield to maturity is 5.75%. As of April 2012 the annual dividend yield was 3.42% and YTD return was 6.56%. The one year return was -1.14%. ELD trades commission free at E*Trade.

Data as of April 2012

ELD Top Ten Holdings & Weightings

  • Russian Federation 7.85%: 4.27%
  • Chile Rep 5.5%: 3.31%
  • Brazil Federative Rep 10.25%: 3.10%
  • Brazil Federative Rep 12.5%: 2.92%
  • Malaysia 4.378%: 2.68%
  • Malaysia 4.012%: 2.56%
  • Malaysia: 2.41%
  • Philippines Rep 4.95%: 2.35%
  • Poland(Rep Of) 5.75%: 2.21%
  • Indonesia(Rep Of) 8.375%: 2.12%

#8: PIMCO High Yield Bond ETF (NYSE:HSY)

HYS follows the BofA Merrill Lynch 0-5 Year US High Yield Constrained Index which is an unmanaged index comprised of U.S. dollar denominated below investment grade corporate debt securities publicly issued in the U.S. domestic market with remaining maturities of less than 5 years. The fund's holdings are rebalanced monthly. The fund was launched in June 2011. The expense ratio is 0.55%. AUM equal $286M and average daily trading volume is 31K shares. This is a relatively new fund marking some of PIMCO's foray into the ETF market. As of April 2012 the annual yield is 2.86% and YTD return 2.35%. The 26 week return was 3.22%.

Data as of April 2012

HYS Top Ten Holdings & Weightings

  • Ally Finl 4.5%: 2.57%
  • Ford Motor Credit Co 8%: 2.40%
  • Sprint Nextel 6%: 1.91%
  • Hca 6.5%: 1.91%
  • Mgm Resorts Intl 6.625%: 1.44%
  • Aes 7.75%: 1.41%
  • Qwest Comms Intl 8%: 1.37%
  • Intl Lease Fin 8.625%: 1.20%
  • Echostar Dbs 7.125%: 1.19%
  • Cit Grp 144A 4.75%: 1.17%

#7: Invesco PowerShares Senior Loan Portfolio ETF (BKLN)

BKLN follows the S&P/LSTA Leveraged Loan 100 Index. The index tracks the market-weighted of the largest institutional leveraged loans. It was launched in March 2011. The expense ratio is 0.83%. AUM of $417.9 million (up from $159 million in July 2011) and the average daily trading volume is over 214K shares.

As of April 2012 the annual dividend yield was 4.67% and YTD return 5.01%. The 1 YR return was 1.97%. Average credit ratings are evenly divided between BB and B with the average duration around 5 years.

Data as of April 2012

BKLN Top Ten Holdings

  • Tribune Company 06/04/14: 2.35%
  • Community Healt 01/25/17: 1.91%
  • Springleaf Fina 05/10/17: 1.84%
  • Intelsat Jackso 04/02/18: 1.70%
  • First Data Corp 03/24/18: 1.70%
  • Clear Channel Tl 1/29/16: 1.69%
  • Texas Comp Elec 10/10/17: 1.68%
  • Chrysler Auto Tl 5/24/17: 1.58%
  • Cengage Learnin 07/03/14: 1.58%
  • Charter Communi 09/06/16: 1.55%

#6: Advisor Shares Peritus High Yield ETF (HYLD)

HYLD is an "active" high yield ETF meaning it doesn't follow a fixed index. The fund was launched in December 2010. More is expected of an actively managed product and that is reflected in the higher expense ratio of 1.35%. AUM is at $2.5M. Average daily trading volume is 18K shares. Credit quality for many bonds is unavailable while the average current duration is less than 7 years.

Remember, an Active ETF can change its holdings anytime and without much history and credit ratings you can only regard this issue as riskier. As of April 2012 the annual yield is projected at 6.90% and YTD performance 7.85%. The 1YR return was 7.85%.

Data as of April 2012

HYLD Top Ten Holdings & Weightings

  • Blackrock Liquidity Mm: 4.58%
  • Harland Clarke Hldgs 9.5%: 4.12%
  • Unifi 11.5%: 4.00%
  • United Refng 10.5%: 4.00%
  • Air Canada 144A 12%: 3.73%
  • Sgs Intl 12%: 3.29%
  • Cedc Fin Corp Intl 9.125%: 3.24%
  • Exide Tech 8.625%: 3.06%
  • Amer Stores Co New 7.9%: 2.79%
  • Rotech Healthcare 10.75%: 2.77%

(NOTE: As an actively managed fund holdings can change without notice.)

#5: Invesco PowerShares Fundamental High Yield Bond ETF (PHB)

PHB follows the RAFI High Yield Bond Index which has more enhanced qualities to the index making it quasi-active. The official description consists of the index measuring the "theoretical portfolio of high yield bonds" of public companies listed on a major stock exchange. The fund was launched in November 2007.

The expense ratio is 0.50%. AUM is $900M (up from $521M in July 20-11) with average daily trading volume around 734K shares. As of April 2012 the annual dividend yield was 5.47% and YTD return was 3.36%. The one year return was 6.24%. Over 70% of the holding are rated BB which is higher than their two chief competitors while average duration is also less than 10 years.

Data as of April 2012

PHB Top Ten Holdings & Weightings

  • Weyerhaeuser 7.375%: 1.39%
  • Sears Hldgs 6.625%: 1.38%
  • Intl Lease Fin 8.625%: 1.36%
  • Intl Lease Fin 8.25%: 1.34%
  • Supervalu 8%: 1.20%
  • Ford Motor Credit Co 8%: 1.17%
  • Ford Motor Credit Co 5.875%: 1.14%
  • Penney J C Corp 5.65%: 1.07%
  • Goodyear Tire & Rubr 8.25%: 1.04%
  • Rite Aid 8%: 1.03%

#4: Invesco PowerShares Emerging Markets Debt ETF (PCY)

PCY follows the DB Emerging Market USD Liquid Balanced Index. This is another more actively adjusted index using a theoretical portfolio of emerging market debt instruments. The country debt is reselected annually based on a proprietary methodology. The ETF was launched in November 2007. The expense ratio is 0.50%, AUM is $1.755M and average daily trading volume is around 780K shares. As of April 2012 annual dividend yield was 5.16% and YTD return 5.98%. The 1 YR return was 12.51%. The funds average duration is roughly 8.5 years and 47% of assets posses a credit quality of BBB with the balance mostly of a lesser rating. PCY trades commission free at TD Ameritrade.

Data as of April 2012

PCY Top Ten Holdings & Weightings

  • Romania Medium Term Nts Reg S 6.75%: 4.15%
  • Vietnam Socialist Rep 6.75%: 2.19%
  • Korea Rep 5.125%: 2.15%
  • Korea Rep 7.125%: 2.14%
  • Islamic Rep Pakistan 6.875%: 2.08%
  • Vietnam(Soc Rep) 6.875%: 2.02%
  • Islamic Rep Pakistan 7.125%: 1.83%
  • Bolivarian Republic Venezuela 11.75%: 1.77%
  • Republic Of Turkey 6.875%: 1.68%
  • Bolivarian Republic Venezuela 9%: 1.64%

#3: iShares JP Morgan Emerging Market Bond ETF (EMB)

EMB follows the JP Morgan EMBI Global Core Index which is a US dollar based benchmark tracking actively traded emerging market debt instruments. The fund was launched in December 2007. The expense ratio is 0.60%. AUM exceeds $4.583M with average daily trading volume around 552K shares. As of April 2012 the annual dividend yield was 3.49% and YTD return 4.12%. The 1YR return was 9.72%. EMB trades commission free at Fidelity.

Data as of April 2012

EMB Top Ten Holdings & Weightings

  • Philippines Rep 7.75%: 4.48%
  • Russian Federation 7.5%: 3.56%
  • Peru Rep 6.55%: 2.96%
  • Brazil Federative Rep 7.125%: 2.84%
  • Republic Of Turkey 6.875%: 2.66%
  • Indonesia(Rep Of) 6.875%: 2.63%
  • Republic Of Turkey 7.25%: 2.29%
  • Republica Oriental Del Uruguay 7.625%: 2.11%
  • Indonesia(Rep Of) 6.625%: 2.08%
  • United Mexican Sts Mtn Be 6.75%: 1.95%

#2: iShares iBoxx High Yield Bond ETF (NYSEARCA:HYG)

HYG follows the iBoxx High Yield Index. The fund was launched in April 2007. The expense ratio is 0.50%. AUM equal $14.988M and average daily trading volume is 2.9M shares. As of April 2012 the annual dividend yield is 5.51% and YTD return of 1.98%. The 1 YR return was 1.98%.

As demand increases for both ETFs and mutual funds, supply considerations become more difficult to deal with for all sponsors. Over 40% of holdings are rated B and the average duration is less than 10 years. High yield will underperform if the economy weakens as companies with lower credit ratings may struggle to make interest and principal payments. HYG trades commission free at Fidelity.

Data as of April 2012

HYG Top Ten Holdings & Weightings

  • First Data 12.625%: 0.82%
  • Sprint Nextel 144A 9%: 0.76%
  • Hca 6.5%: 0.75%
  • Cit Grp 7%: 0.72%
  • Intelsat Bermuda 11.25%: 0.72%
  • Harrahs Oper 10%: 0.67%
  • Cit Grp 144A 5.5%: 0.63%
  • Calpine 7.5%: 0.61%
  • Clear Channel Ww Hldgs 9.25%: 0.59%
  • Springleaf Fin 6.9%: 0.56%

#1: SPDR Barclays Capital High Yield Bond ETF (JNK)

JNK follows the Barclays Capital High Yield Very Liquid Index. The index follows company bonds with ratings in the middle range of high yield status (Ba1/BB+) and have $600 million in outstanding face value. The fund was launched in November 2007. The expense ratio is 0.40%. AUM equal $11.913 M and average daily trading volume is 4.9M shares. As of April 2012 the annual dividend yield is 6.25%. The YTD return is 3.33% and the 1 YR return is 3.27%. JNK trades commission free at TD Ameritrade.

Data as of April 2012

JNK Top Ten Holdings & Weightings

  • Sprint Nextel 144A 9%: 1.50%
  • Cit Grp 7%: 1.45%
  • Hca 6.5%: 1.44%
  • First Data 12.625%: 1.37%
  • Harrahs Oper 10%: 1.18%
  • Engy Future Inter Hldg Co Ll 10%: 1.07%
  • Clear Channel Ww Hldgs 9.25%: 1.01%
  • Ally Finl 8.3%: 1.00%
  • Calpine 7.5%: 1.00%
  • Ford Motor Credit Co 5.875%: 0.99%

We rank the top 10 ETF by our proprietary stars system as outlined below. If an ETF you're interested in is not included but you'd like to know a ranking send an inquiry to and we'll attempt to satisfy your interest.

Strong established linked index
Excellent consistent performance and index tracking
Low fee structure
Strong portfolio suitability
Excellent liquidity

Established linked index even if "enhanced"
Good performance or more volatile if "enhanced" index
Average to higher fee structure
Good portfolio suitability or more active management if "enhanced" index
Decent liquidity

Enhanced or seasoned index
Less consistent performance and more volatile
Fees higher than average
Portfolio suitability would need more active trading
Average to below average liquidity

Index is new
Issue is new and needs seasoning
Fees are high
Portfolio suitability also needs seasoning
Liquidity below average

Mixing High Yield with Emerging Market Debt/Bonds may seem unusual but there aren't enough issues for a standalone top 10 report. That said, the two sectors share mutual interest from investors seeking to maximize yield. Recently it seems investor enthusiasm is going a little overboard and throwing caution to the wind in this drive for yield. I would advise caution here. But having been a bond principal previously the old maxim "the thing you know most is what you like least" sometimes applies.

It's also important to remember that ETF sponsors have their own competitive business interests when issuing products which may not necessarily align with your investment needs. New ETFs from highly regarded and substantial new providers are also being issued. These may include Charles Schwab's ETFs and Scottrade's Focus Shares which both are issuing new ETFs with low expense ratios and commission free trading at their respective firms. These may also become popular as they become seasoned.

(Source for data is from ETF sponsors and various ETF data providers)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The ETF Digest is long EMB.