Ten years ago, when someone talked about investing in emerging markets, you could be fairly certain they were a) talking about equities and b) talking about stocks with much higher risk than those in developed market countries.
Not so today as investor dissatisfaction with developed markets performance has shattered the emerging markets monolith, making way for products devoted to specific countries, regions and high performers like the BRICs.
Another big sign that emerging markets have come of age has been the huge proliferation of debt products, not just sovereign debt products but also a growing pool of corporate debt products emanating from the emerging markets space.
Last week, a new ETF kicked the emerging markets debt trend into high gear with the introduction of a high yield debt product. The Market Vectors Emerging Markets High Yield Bond ETF (HYEM) was launched by investment manager, Van Eck Global. It is devoted to dollar-denominated high yield corporate bonds from emerging markets and it aims to target investors’ growing appetite for yield in what has been an ongoing low return investment environment.
Van Eck’s managers reckon their product opens up another window of growth for investors focused on less developed countries. The firm also points out that emerging market companies tend to default less frequently than American or European firms.
S&P data show an annual default rate of 1.55% for high-yield emerging-market companies from 1981 to 2011, versus 3.64% in the U.S. and 1.75% in Europe.
The ETF tracks the BofA Merrill Lynch High Yield US Emerging Markets Liquid Corporate Plus Index, which has a year-to-date total return of 10.35% and a 12-month return of 3.95%. Among HYEM’s top 10 holdings is Vedanta Resources PLC (VED.LN), a U.K.-based mining company with operations in India, Africa and Australia. Other top holdings include 8.5% coupon bonds due 2017 from Petroleos de Venezuala SA, and 7.504% coupon bonds due 2017 from Netherlands-based telecom VimpelCom Holdings BV.
The global high yield market has ballooned in recent years up to $1.343 trillion in 2011 from just $219 billion in 1997. Van Eck’s product is the 10th high yield bond ETF to launch this year. AllianceBernstein has noted that emerging market companies issued nearly three times as much debt as their governments last year.