Investors searching for yields around the globe are in a bit of a precarious position. The yield on the AA-rated 10-year United States Treasury bond is nearing 1.80%, hardly an attractive number. The yields across the pond in Europe are much higher, however the risk that goes along with it is too much for most retail investors.
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So, where does an investor searching for a reasonable yield turn today? My opinion is that the answer is corporate bonds and in particular high yield corporate bonds based around the globe.
U.S. High Yield
The two largest high yield corporate bond exchange-traded funds (ETFs) are the SPDR Barclays High Yield Bond ETF (ARCA:JNK) and the iShares iBoxx High Yield Corporate Bond ETF (ARCA:HYG). HYG has over $15 billion in assets and is composed of nearly 600 different bonds. The yield is 6.5% and it charges an expense ratio of 0.5%. Over the past year the ETF is down roughly 2%, not including dividends.
JNK is down about 3% in the last 12 months and charges an expense ratio of 0.4%. The ETF, which is composed of 226 bonds, currently has a yield of 6.75%. Both ETFs are lagging the 1% gain of the SPDR S&P 500 ETF (ARCA:SPY), but with dividends included the returns are nearly identical.
SEE: Corporate Bonds: An Introduction To Credit Risk
Emerging Market High Yield
The newly introduced Market Vectors Emerging Markets High Yield Bond ETF (ARCA:HYEM) is comprised of U.S. dollar denominated bonds issued by non-sovereign emerging markets that have junk bond status. This is the first ETF to concentrate on the niche asset class and could be welcomed with open arms.
According to Van Eck, the company behind Market Vectors, the emerging market high yield corporate bonds offers higher yields than their U.S. counterparts and emerging market sovereign debt. They also claim the default rate is lower for emerging market versus U.S. high yield corporate debt. The company has not yet released a yield for the ETF, which will pay out the dividends monthly. The expense ratio will be 0.40%.
HYEM is composed of bonds based in China (13.2%), Russia (10.8%), Indonesia (8.0%) and Venezuela (7.0%). The majority (63.45%) are companies in the industrial sector.
New iShares ETFs
Two new iShares ETFs launched in early April that focus on high yield corporate bonds around the globe. The iShares Global High Yield Corporate Bond ETF focuses on bonds with below investment grade ratings based around the globe. The U.S. (69%) makes up the majority of the allocation followed by the United Kingdom (5%), Luxembourg (4%) and Canada (3%). All of the bonds are denominated in U.S. dollars (78%), euros, British pounds or Canadian dollars. The expense ratio is 0.4% and the yield to maturity on the index is 7.0%.
The iShares Global ex-US High Yield Corporate Bond ETF is similar to GHYG except there is no exposure to bonds denominated in U.S. dollars. The ETF is heavily concentrated in Europe with France (17%), Luxembourg (15%), U.K. (15%), Netherlands (8%) and Germany (8%) being the top countries. The expense ratio is 0.4% and the yield to maturity on the index is 8.1%.
SEE: How To Compare Yields On Different Bonds.
The Bottom Line
The global high yield corporate bond market is now at the fingertips of all retail investors. This is great, except how does one invest in this asset class? Investors looking to gain exposure to developed markets around the globe could opt for GHYG. If the U.S. is the focus, there is JNK and HYG. Emerging markets are covered with HYEM and the troubled Western Europe has HYXU.
SEE: Should You Invest In Emerging Markets?
A combination of the above mentioned ETFs would be the best strategy for most investors. One of the U.S.-focused ETFs combined with HYEM would be my suggestion at this time. With too many uncertainties in Western Europe, the risk is not worth the reward for the two new iShares ETFs. That being said, there will be a time in the future that they will be trading at bargain levels.
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