I always find high yield and high dividend investments appealing, especially when investing through ETFs or other funds. During the 2022 drawdown, I began a Dollar Cost Averaging (DCA) strategy on the iShares Broad USD High Yield Corporate Bond ETF (USHY), and I have been pleased with the results, especially after the recent decline in the S&P 500. However, the spread between US High Yield and Investment Grade bonds has decreased significantly, leading me to shift my focus to the global bond market, particularly the investment grade sector, due to the more attractive risk premium.
If I were to choose a long-term investment, I would prefer to accumulate shares of a high yield fund rather than a monetary fund because of the diversification benefits and strong performance of high yield corporate bond funds. Currently, I believe it is a great time to accumulate in the emerging markets high yield bond sector, specifically using the VanEck Emerging Markets High Yield Bond ETF (HYEM).
The VanEck Emerging Markets High Yield Bond ETF follows the ICE BofA Diversified High Yield US Emerging Markets Corporate Plus Index, which provides a clear composition of the fund. The fund’s geographical composition includes countries like China, Turkey, United Kingdom, Brazil, and more. The inclusion of UK and US bonds in the ETF helps stabilize its performance, although the Total Expense Ratio (TER) is somewhat high at 0.40%.
Investing in high yield emerging market bonds could be a wise decision at this time due to the increase in the risk of a US recession, which is affecting the ICE BofA High Yield Emerging Markets Corporate Plus Index Option-Adjusted Spread. The spread has narrowed in the US and Europe, but in emerging markets, it remains stable, possibly due to increased demand for EM bonds amid recession risks in the US. Additionally, the weakening dollar could benefit emerging markets by reducing the risk of default on dollar-denominated debt.
While there are short-term risks associated with investing in emerging markets, such as a strengthening dollar during a recession, in the long term, the relatively higher yields of emerging market bonds could attract international investors, increasing demand for these bonds. It is crucial to note that a very low Option-Adjusted Spread (OAS) could indicate underestimation of risk by investors, leading to vulnerabilities if market conditions deteriorate.
In conclusion, I maintain a ‘hold’ rating for HYEM due to the insights provided by the ICE BofA High Yield Emerging Markets Corporate Plus Index Option-Adjusted Spread and the potential impact of a decreasing DXY on the emerging markets sector. This could be an opportune time to consider increasing or building a position in HYEM to enhance diversification in a balanced portfolio.
