Fine-Tuning Portfolio Exposures
Index design typically reflects market conventions and investor behavior, but can have unexpected and surprising impacts on portfolio exposures. Because there is virtually no overlap with U.S. high yield corporate benchmarks, and because investors may already have exposure to investment grade emerging markets corporate through a U.S. corporate bond allocation, we believe that emerging markets high yield corporate bonds can allow investors to better calibrate their exposures to achieve desired outcomes.
Empirical evidence has shown that emerging market (or EM) high yield corporate bonds (HYEM) have outperformed and provided better yields than US counterparts in the past. Improving fundamentals and lower credit and interest rate risk have made EM high yield corporate bonds attractive this year.
They also have lower default rates than US counterparts as shown in the chart below. Franklin Templeton mentioned in a research piece last month that according to credit rating agency Standard & Poor’s (or S&P), EM corporate bonds had a lower default rate than US corporate bonds in 15 out of the 17 years up until 2017.
A post on the emerging market corporate bond outlook for 2019 by Erste Asset Management also discussed the positive trends in the emerging market economies currently. For example, the new government in Brazil seems to be taking better reform measures after the elections in Brazil. Many EM economies are in a better position when it comes to debt levels. Given the long-term economic growth prospects for emerging economies, investors may want to consider enhancing their portfolio with emerging markets bonds.
Investors interested in high yield corporate emerging markets bonds can consider the VanEck Vectors Emerging Markets High Yield Bond ETF (HYEM). Of course, it’s important to mention that every investment carries some risk, and choosing to invest in emerging markets includes currency risk, credit risk, default risk, and market risk. Thus, investors should weigh the pros and cons before making investment decisions.