ETF Centre

HYEM: Withstanding rising rates

Emerging markets high yield (EM HY) corporate bonds have been a bright spot within emerging markets debt over the past year, despite the increase in US interest rates. Let's see what VanEck has to say about the EM HY corporate bonds.

VanEck
VanEck07 Jun 2021 1530 Views
HYEM: Withstanding rising rates
  • Emerging markets high yield (EM HY) corporate bonds have been a bright spot within emerging markets debt over the past year, despite the increase in US interest rates.
  • EM debt has historically reacted positively to a rising rate environment, particularly if rates are rising because of improving growth outlook.
  • This makes sense, given that higher US growth tends to lead to higher imports from EM countries, increased capital flows, and generally greater risk appetite.
  • In addition to a shorter duration and higher spread buffer against rising rates, we believe EM HY corporate bonds are well positioned to benefit from the spike in expected global growth rates this year, and investors can gain exposure to this via the VanEck Vectors Emerging Markets High Yield Bond ETF (NYSE: HYEM). 

Standout performers

EM HY corporate bonds have been the brightest spots within EM debt in the past year, despite the increase in US interest rates that began last summer and accelerated at the beginning of 2021.

This segment of the market may also be relatively more insulated from higher local interest rates and fluctuations in the US dollar, while the global exposure of many of the issuers allows the category to benefit from the spike in expected global growth rates this year. At the same time, EM HY corporates are one of the few areas where investors can still find yields that are still well above 5%.

Figures 1 and 2: EM HY corporates outperform amid rising rates

 

 

Index

Wtd. Average Yield

Effective Duration

EM HY Corporates

ICE BofA Diversified High Yield US Emerging Markets Corporate Plus Index

5.41

3.6

Local EM Sovereign

JPM GBI-EM Global Diversified Index

4.81

5.2

USD EM Sovereign

JPM EMBI Global Diversified Index

4.44

7.9

Broad EM Corporates

ICE BofA US Emerging Markets Liquid Corporate Plus Index

3.46

5.3

Sources: ICE Data Indices, J.P. Morgan and Morningstar, as of 5/21/2021. Timeframe for data reflects rise of interest rates.


Factors driving performance

The lower interest rate sensitivity of emerging markets high yield corporates, compared to other US dollar denominated EM debt sectors, has been a key driver of outperformance vs broad EM corporate debt over the past year as interest rates rose (see index definitions in table above).

EM HY corporates have a duration of 3.6, compared to 5.3 of broad EM corporates and nearly 8 of USD EM sovereigns. Further, the segment’s duration has remained close to where it was five years ago. The duration of USD EM sovereigns, on the other hand, has extended significantly from about 6.7 five years ago, while the duration of broad EM corporates was about 4.6 five years ago.

In addition to the shorter duration, EM HY corporates benefit from a high average spread, which provides a potential cushion against rising rates. For the year-to-date through 21 May 2021, the average spread has tightened by 41 basis points, nearly offsetting the 47 basis point increase in the 5-Year US Treasury yield.

The upshot, of course, is that spreads are now at historically tight levels. However, EM HY corporates continue to provide a spread pickup of 135 basis points vs US HY corporate bonds.

Further, with what we view as expected strong global growth, continued easy monetary policies and very benign credit conditions, it is difficult to identify a likely catalyst for widening out, particularly if the recent calmer tone in US interest rates continues. In addition, we believe with the current high exposure to energy (15%) and Basic Industry (16%), EM HY corporates may continue to benefit from the upswing in global commodity prices.


Key points of HYEM:

  • Focuses solely on the non-sovereign segment of the HY EM bond market
  • Yield pickup and currently lower duration vs US HY corporate bonds
  • Adds issuer and country diversification to a US-only high yield exposure

Fund details

as of 1 June 2021

Distribution yield

5.51%

Effective Duration (yrs)

3.57

Years to Maturity

7.90

Distribution Frequency

Monthly

Exchange

NYSE Arca



Disclaimer:

The offer of invitation of the Shares/Units of VanEck Vectors Pharmaceutical ETF (the “Fund”), which is the subject of this material, does not relate to a collective investment scheme which is authorised under section 286 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”) or recognised under section 287 of the SFA. The Fund is not authorised or recognised by the Monetary Authority of Singapore (the “MAS”) and Shares/Units are not allowed to be offered to the retail public. This material and any other document or material issued in connection with the offer or sale is not a prospectus as defined in the SFA. Accordingly, statutory liability under the SFA in relation to the content of prospectuses would not apply. You should consider carefully whether the investment is suitable for you.

This material has not been registered as a prospectus with the MAS. Accordingly, this material and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of Shares/Units may not be circulated or distributed, nor may Shares/Units be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than to an institutional investor under Section 304 of the SFA.

The Fund may only be promoted exclusively to persons who are sufficiently experienced and sophisticated to understand the risks involved in investing in the Fund, and who satisfy certain other criteria provided under Section 304 of the SFA and the subsidiary legislation enacted thereunder. This material is for general information purposes only and should not be regarded as the prospectus or information memorandum nor forming part thereof. In Singapore, this material may only be distributed together with the prospectus or information memorandum, which must be referred to for information on the Fund.

S-Network Global Indexes, LLCSM", "ARDOUR GLOBAL INDEXSM (Composite)", "ARDOUR COMPOSITESM", "ARDOUR GLOBAL INDEXSM (Extra Liquid)", "ARDOUR - XLSM", "ARDOUR GLOBAL ALTERNATIVE ENERGY INDEXESSM" "ARDOUR FAMILYSM" are service marks of S-Network Global Indexes, Inc. and have been licensed for use by Van Eck Associates Corporation. The Product(s) is/are not sponsored, endorsed, sold or promoted by S-Network Global Indexes Inc. and Ardour Global Indexes, LLC makes no representation regarding the advisability of investing in the Product(s).

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.

You can lose money by investing in the Fund(s). Any investment in a Fund(s) should be part of an overall investment program, not a complete program. Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of the Fund(s) carefully before investing. Past performance is no guarantee of future results.

All materials and contents found in this site are strictly for general circulation and informational purposes only and should not be considered as an offer, or solicitation, to deal in any of the funds or products found/identified in this site. While iFAST Financial Pte Ltd ("IFPL") has tried to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies and typographical errors. Any opinion or estimate contained in this report is made on a general basis and neither IFPL nor any of its servants or agents have given any consideration to nor have they or any of them made any investigation of the investment objective, financial situation or particular need of any user or reader, any specific person or group of persons. You should consider carefully if the products you are going to purchase are suitable for your investment objective, investment experience, risk tolerance and other personal circumstances. If you are uncertain about the suitability of the investment product, please seek advice from a financial adviser, before making a decision to purchase the investment product. Past performance is not indicative of future performance. The value of the investment products and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. In respect of any matters arising from, or in connection with the said research analyses or research reports, recipients of the report are to contact IFPL at 10 Collyer Quay, #26-01 Ocean Financial Centre Building, Singapore 049315, or by telephone at +65 6557 2853. Where the report contains research analyses or research reports from a foreign research house and if the recipient of such research analyses or research reports is not an accredited investor, expert investor, institutional investor or an ex-accredited investor, IFPL accepts legal responsibility for the contents of such analyses or reports to such persons only to the extent as required by law. Please note that only certain security(ies) herein are available to all investors, while the rest are only available for certain persons to invest in, such as Accredited Investors (as defined in the Securities and Futures Act) or one who invests at least S$200,000 (or its equivalent currency) per transaction. To qualify as an Accredited Investor, one needs to submit a declaration form and certain relevant supporting documents, according to iFAST’s prevailing policies and procedures.

Please read our full disclaimers on the website at ( https://secure.fundsupermart.com/fsmone/policies/328125/investment-account-terms-&-conditions).

iFAST Financial Pte Ltd (IFPL) (registered address: 10 Collyer Quay #26-01 Ocean Financial Centre Singapore 049315, Telephone: 6557 2000) holds the Financial Advisers Licence issued by the Monetary Authority of Singapore ('MAS') to conduct regulated activities of advising on securities, marketing of collective investment schemes and arranging of any contract of insurance in respect of life policies, other than a contract of reinsurance and the Capital Markets Services Licence issued by the MAS to conduct regulated activities of dealing in securities and providing custodial services for securities. While IFPL has made every effort to ensure the independence of the report's contents, IFPL's nature of business is such that IFPL and its connected and associated entities together with their respective directors, officers and staff may be involved in providing dealing or investment-related services in the abovementioned securities, and have taken or may take positions in the securities mentioned in this report, and may also act as the principal for any buy or sell trades.

In this article

NYSE: HYEM

VanEck Emerging Markets High Yield Bond ETF
Related Articles
ETF Centre

China’s Hidden AI Giants: How to Invest in China’s Silicon Valley

ETF Centre

Q&A Series: LionGlobal Short Duration Bond Fund (Active ETF SGD Class)

ETF Centre

Q&A Series: LionGlobal Short Duration Bond Fund (Active ETF SGD Class)

ETF Centre

1 SGX-Listed ETF That Can Truly Diversify Your Portfolio

Stay updated with us on Telegram

Like us on Facebook

Follow us on Instagram

Watch our videos on YouTube