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TOP 10 HIGH YIELD & EMERGING MARKET BOND ETFs

 


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 even greater historical returns from Emerging Markets.

 

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 were found in the junk 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 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 from equities to bonds was strong and this combined with the dissatisfaction with low yields from more credit worthy sectors. Investors have rationalized greater safety in government subsidies 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 odd factors 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 have thrown traditional wide spreads between sector yields out of whack making analysis difficult.

 

Below are several tables and charts reflecting current conditions within these various sectors with yields and spreads one to another.

 

 

 

Demand for yield is a condition not lost on ETF issuers and new products were issued and assets in these categories have grown substantially. We’ll investigate some, not all, of the top issues in both these sectors.

 

Let’s look at typical and more popular choices.

 

HYG (iShares iBoxx High Yield Bond ETF) tracks the index of the iBoxx High Yield Index. It’s been a big money maker for iShares given the fee of .50%. The current yield is near 7.75% and one year return is over 18% which enhances the “you get what you pay for” theme. AUM (Assets under Management) are just shy of $9B and average daily trading volume is just over 1M shares. 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

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