Top High-Yield, Emerging-Market Bond ETFs

 

With yields low, investors seeking income are tempted to seek yield in other sectors where real rates of return after inflation can be found. Higher yields have traditionally been found in so-called High-Yield (Junk) bonds with even greater historical returns from Emerging Markets.

With High-Yield bonds a unique condition occurred after the bottom of the 2008 bear market in equities. Companies once considered investment grade, particularly in the financial sector, suddenly were found in the junk category. As many of these companies were bailed-out or subsidized by the government the sector became more attractive to opportunistic investors. Demand for yield and return of capital also stimulated investors no longer as interested in equities due to previous heavy losses. Further, demographics with an aging baby boomer population also fed the demand for both yield and perceived safety. Why junk then? The momentum from equities to bonds was strong and this combined with the dissatisfaction with low yields from more credit worthy sectors. Investors have rationalized greater safety in government subsidies than credit ratings would indicate to gain more yield.

Emerging markets offered new opportunities as well. With growth from these economies in high gear opinions regarding their debt improved correspondingly. With demand for yield high this allowed investors to rationalize investments in these sectors.

Nevertheless, High-Yield and Emerging Market Bonds have historically traded at certain "spreads" to higher rated debt. These spreads given odd factor of nearly zero interest rate policies in the U.S., the unique circumstances cited within the High-Yield sector and economic growth in Emerging Markets seem to have tightened spread differentials to the naked eye given low yields. But, in actuality these spreads seem within traditional wide ranges.

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Strong established linked index
Excellent consistent performance and index tracking
Low fee structure
Strong portfolio suitability
Excellent liquidity

Established linked index even if "enhanced"
Good performance or more volatile if "enhanced" index
Average to higher fee structure
Good portfolio suitability or more active management if "enhanced" index
Decent liquidity

Enhanced or seasoned index
Less consistent performance and more volatile
Fees higher than average
Portfolio suitability would need more active trading
Average to below average liquidity

Index is new
Issue is new and needs seasoning
Fees are high
Portfolio suitability also needs seasoning
Liquidity below average

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In U.S. high yield, two issues remain overwhelmingly dominant--HYG and JNK. The rest are interesting in the second tier.

 

Top rated High Yield Bond ETFs:

 

#1: iShares iBoxx High Yield Bond ETF (HYG)

 

HYG follows the iBoxx High Yield Index. The fund was launched in April 2007. The expense ratio is .50%. AUM (Assets under Management) equal $11.6 billion (up from $8 billion in July 2011) and average daily trading volume is just over 2M shares. As of mid-January 2012 the annual dividend yield is 7.26% and YTD return of -.46%. The one year return was 5.19%.

 

As demand increases for both ETFs and mutual funds, supply considerations become more difficult to deal with for all sponsors. Over 40% of holdings are rated B and the average duration is less than 10 years. High yield will underperform if the economy weakens as companies with lower credit ratings may struggle to make interest and principal payments.

 

Data as of First Quarter 2012

HYG Top Ten Holdings & Weightings

1. Citigroup 7%: 0.89%
2. HCA 6.5%: 0.78%
3. First Data 12.625%: 0.73%
4. Citigroup 7%: 0.69%
5. Sprint Nextel 144A 9%: 0.67%
6. Intelsat Bermuda 11.25%: 0.67%
7. Harrahs Operations 11.25%: 0.58%
8. Lyondell Chemical 11%: 0.58%
9. Ally Financial 8.3%: 0.57%
10. Calpine 7.5%: 0.56%

 

 

#2: SPDR Barclays Capital High Yield Bond ETF (JNK)

 

JNK follows the Barclays Capital High Yield Very Liquid Index. The index follows company bonds with ratings in the middle range of high yield status (Ba1/BB+) and have $600 million in outstanding face value. The fund was launched in November 2007. The expense ratio is .40%. AUM equal $9.4 billion (up from $6.7 billion in July 2011) and average daily trading volume is 4.7M shares. As of mid-September 2011 the annual dividend yield is 8.37% and YTD return is -3.90%. The highest holdings consist of 50% rated B with an average duration of less than 10 years.  

 

Data as of First Quarter 2012

JNK Top Ten Holdings & Weightings

1. HCA 6.5%: 1.54%
2. Sprint Nextel 144A 9%: 1.44%
3. First Data 12.625%: 1.27%
4. Energy Future International 10%: 1.16%
5. Harrahs Operations 10%: 1.12%
6. Citigroup 7%: 1.10%
7. Clear Channel  9.25%: 1.10%
8. FMG Resources August 2006 Pty 7%: 1.01%
9. Calpine 7.5%: 0.97%
10. Dish Network 6.75%: 0.97%

 

#3: PowerShares Fundamental High Yield Bond ETF (PHB)

PHB follows the RAFI High Yield Bond Index which has more enhanced qualities to the index making it quasi-active. The official description consists of the index measuring the "theoretical portfolio of high yield bonds" of public companies listed on a major stock exchange. The fund was launched in November 2007.

The expense ratio is .50%. AUM is $695M (up from $521M in July 20-11) with average daily trading volume around 395K shares. As of mid-January 2012 the annual dividend yield was 5.47% and YTD return was -.89%. The one year return was 5.93%. Over 70% of the holding are rated BB which is higher than their two chief competitors while average duration is also less than 10 years.

Data as of First Quarter 2012

PHB Top Ten Holdings & Weightings

1. Weyerhaeuser 7.375%: 1.56%
2. Intl Lease Fin 8.625%: 1.47%
3. Sears Hldgs 6.625%: 1.35%
4. Sprint Nextel 6%: 1.29%
5. Ford Motor Credit Co 8%: 1.26%
6. Ford Motor Credit Co 7%: 1.22%
7. Supervalue 8%: 1.21%
8. Kinder Morgan Fin Corp Ulc 5.7%: 1.06%
9. Hertz 6.75%: 1.05%
10. Williams Cos Inc Del 7.875%: 1.05%

 

#4: PIMCO High Yield Bond ETF (HYS)

HYS follows the BofA Merrill Lynch 0-5 Year US High Yield Constrained Index which is an unmanaged index comprised of U.S. dollar denominated below investment grade corporate debt securities publicly issued in the U.S. domestic market with remaining maturities of less than 5 years. The fund's holdings are rebalanced monthly. The fund was launched in June 2011.

The expense ratio is .55%. AUM equal $151 million and average daily trading volume is 11K shares. This is a relatively new fund marking some of PIMCO's foray into the ETF market. As of mid-January 2012 the annual yield is 6.40% and YTD return .32%. The 26 week return was .59%.

Data as of First Quarter 2012

HYS Top Ten Holdings & Weightings

1. Ally Financial 4.5%: 2.31%
2. Citigroup 7%: 2.20%
3. Qwest Communications 8%: 1.73%
4. Ford Motor Credit Co 8%: 1.68%
5. HCA 6.5%: 1.61%
6. MGM Resorts Intl 10.375%: 1.57%
7. International Lease  144A 6.5%: 1.38%
8. Regions Financial Corp New 7.75%: 1.24%
9. Echostar  7.125%: 1.23%
10. CHS Community Health Sys 8.875%: 1.09%

 

#5: PowerShares Senior Loan Portfolio ETF (BKLN)

BKLN follows the S&P/LSTA Leveraged Loan 100 Index. The index tracks the market-weighted of the largest institutional leveraged loans. It was launched in March 2011.

The expense ratio is .83%. AUM of $218 million (up from $159 million in July 2011) and the average daily trading volume is over 108K shares. As of mid-January 2012 the annual dividend yield was 4.72% and YTD return 1.22%. The 26 week return given the shorter history was -.85%. Average credit ratings are evenly divided between BB and B with the average duration around 5 years.

Data as of First Quarter 2012

BKLN Top Ten Holdings

1. First Data Corp 09/24/14: 2.93%
2. Tribune Company 06/04/14: 2.46%
3. Springleaf Financial 05/10/17: 1.86%
4. Intelsat Jackson 04/02/18: 1.83%
5. First Data Corp 03/24/18: 1.79%
6. Reynolds Group Issuer 144A 7.875%: 1.73%
7. Harrah's Operations 01/28/15: 1.70%
8. Clear Channel Tl 1/29/16: 1.69%
9. Charter Communications 09/06/16: 1.59%
10. CSC Holdings, I 03/29/16: 1.55%

 

#6: Advisor Shares Peritus High Yield ETF (HYLD)

HYLD is an "active" high yield ETF meaning it doesn't follow a fixed index. The fund was launched in December 2010. More is expected of an actively managed product and that is reflected in the higher expense ratio of 1.35%. AUM is low but rising and now stands at $62 million (up from $53 million in July 2011) making it profitable for both the advisor and sponsor.

This is important since new products like this need to be successful to endure and assure investors it's a going concern. Average daily trading volume is 9K shares. Credit quality for many bonds is unavailable while the average current duration is less than 7 years. Remember, an Active ETF can change its holdings anytime and without much history and credit ratings you can only regard this issue as riskier. As of mid-January 2012 the annual yield is projected at 6.87% and YTD performance .30%. The 26 week return was .32%.

Data as of First Quarter 2012

HYLD Top Ten Holdings & Weightings

(NOTE: As an actively managed fund holdings can change without notice.)

1. SGS Intl 12%: 4.20%
2. Poindexter J B 8.75%: 3.31%
3. Connacher Oil & Gas 8.5%: 3.25%
4. Sanmina Sci 144A 7%: 3.11%
5. Harland Clarke Hldgs 9.5%: 3.10%
6. Air Canada 144A 12%: 2.98%
7. Unifi 11.5%: 2.97%
8. AEP Industries 8.25%: 2.96%
9. Valassis Communications 6.625%: 2.86%
10. Level 3 Financing 9.25%: 2.76%

 

Top Rated Emerging Market Bond ETFs

#1: iShares JP Morgan Emerging Market Bond ETF (EMB)

EMB follows the JP Morgan Emerging Market Bond Index which is a US dollar based benchmark tracking actively traded emerging market debt instruments. The fund was launched in December 2007. The expense ratio is .60%. AUM exceeds $3.5B with average daily trading volume around 400K shares. As of mid-January 2012 the annual dividend yield was 4.90% and YTD return -1.31%. The one year return was 5.48%.

Data as of First Quarter 2012

EMB Top Ten Holdings & Weightings

1. Philippines Rep 7.75%: 4.49%
2. Russian Federation 7.5%: 3.83%
3. Republic Of Turkey 7.25%: 3.31%
4. Republic Of Turkey 6.875%: 3.23%
5. Brazil Federative Rep 7.125%: 3.18%
6. Peru Rep 6.55%: 2.83%
7. Indonesia(Rep Of) 6.875%: 2.68%
8. Colombia Rep 7.375%: 2.48%
9. Republica Oriental Del Uruguay 7.625%: 2.33%
10. Petronas Cap 5.25%: 2.27%

 

 

#2: PowerShares Emerging Markets Debt ETF (PCY)

PCY follows the DB Emerging Market USD Liquid Balanced Index. This is another more actively adjusted index using a theoretical portfolio of emerging market debt instruments. The country debt is reselected annually based on a proprietary methodology. The ETF was launched in November 2007. The expense ratio is .50%, AUM is $1.4B and average daily trading volume is around 600K shares.

As of mid-January the annual dividend yield was 5.54%% and YTD return -2.10%. The one year return was 5.85%. The funds average duration is roughly 8.5 years and 47% of assets posses a credit quality of BBB with the balance mostly of a lesser rating.

Data as of First Quarter 2012

PCY Top Ten Holdings & Weightings

1. Bulgaria Rep 8.25%: 4.09%
2. Korea Rep 5.125%: 2.16%
3. Vietnam Socialist Rep 6.75%: 2.13%
4. Korea Rep 7.125%: 2.11%
5. Islamic Rep Pakistan 6.875%: 2.11%
6. Vietnam(Soc Rep) 6.875%: 2.02%
7. Islamic Rep Pakistan 7.125%: 1.85%
8. Indonesia(Rep Of) 6.625%: 1.66%
9. Brazil Federative Rep 7.125%: 1.66%
10. United Mexican Sts Mtn Be 6.05%: 1.65%

 

#3: Wisdom Tree Emerging Markets Local Debt Fund (ELD)

ELD doesn't seem to be following an established index that we can tell. It's based on local currency issues from a variety of emerging market countries. If there's pressure on the US dollar then perhaps some country currencies will outperform adding more to returns. Naturally the opposite can be the case.

The fund was launched in September 2010. ELD has an expense ratio of .55%, AUM equal nearly $1 billion and average daily trading volume of 209K shares. The credit quality is quite mixed with most assets greater than BBB which is unique for the category. The average duration is less than 10 years while the average yield to maturity is 5.75%. As of mid-January 2012 the annual dividend yield was 4.60% and YTD return was 2.24%. The one year return was .70%.

Data as of First Quarter 2012

ELD Top Ten Holdings & Weightings

1. Russian Federation 7.85%: 3.83%
2. Chile Rep 5.5%: 3.31%
3. Brazil Federative Rep 10.25%: 3.28%
4. Brazil Federative Rep 12.5%: 3.12%
5. Malaysia 4.012%: 2.81%
6. Malaysia: 2.78%
7. Philippines Rep 4.95%: 2.32%
8. Malaysia 4.378%: 2.31%
9. Indonesia(Rep Of) 8.375%: 2.31%
10. Malaysia 3.835%: 2.20%

#4: Wisdom Tree Asia Local Debt ETF (ALD)

 

ALD is another offering from Wisdom Tree not tied to a particular index. Clearly the focus is on Asian market debt (ex-Japan) with the idea to capture both yield and perhaps even enhanced return from local currency appreciation. This, of course, is a door that swings both ways. The fund was launched in March of 2011. The expense ratio is .55%. AUM equal $398M with average daily trading volume of 67K shares. Asset quality is quite mixed with 43% AAA and 43% Non-rated.

Some of this is due to the unique nature of using forward contracts to buy securities. The average duration of the fund is between 2-7 years. The holdings data below are approximate and due to high portfolio turnover due to forward contract rollover is hard to fix. As of mid-January 2012 the SEC dividend yield was 2.26%. The YTD return was 1.26%. The one year return was 1.26%.

Data as of First Quarter 2012

ALD Top Ten Holdings & Weightings

1. Indonesia(Rep Of) 7.375%: 4.46%
2. Korea(Republic Of) 4.5%: 3.97%
3. Korea(Republic Of) 3.75%: 3.91%
4. Malaysia 4.012%: 3.86%
5. Philippines Rep 4.95%: 3.68%
6. Malaysia 3.21%: 3.46%
7. Korea(Republic Of) 4%: 3.18%
8. Thailand(Kingdom) 5.25%: 3.08%
9. Australia 6.25%: 2.99%
10. Thailand(Kingdom) 5.25%: 2.98%

 

 

Mixing High Yield with Emerging Market Debt/Bonds may seem unusual but there aren't enough issues for a standalone top 10 report. That said, the two sectors share mutual interest from investors seeking to maximize yield. Recently it seems investor enthusiasm is going a little overboard and throwing caution to the wind in this drive for yield. I would advise caution here. But having been a bond principal previously the old maxim "the thing you know most is what you like least" sometimes applies.

It's also important to remember that ETF sponsors have their own competitive business interests when issuing products which may not necessarily align with your investment needs. New ETFs from highly regarded and substantial new providers are also being issued. These may include Charles Schwab's ETFs and Scottrade's Focus Shares which both are issuing new ETFs with low expense ratios and commission free trading at their respective firms. These may also become popular as they become seasoned. 

For further information about portfolio structures using technical indicators like DeMark and other indicators, take a free 14-day trial at ETF Digest. Follow us on Twitter and Facebook as well and join our group conversations.

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The ETF Digest has no current positions in the featured ETFs.

(Source for data is from ETF sponsors and various ETF data providers)

 

 

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

Dave Fry is founder and publisher of ETF Digest, Dave's Daily blog and the best-selling book author of Create Your Own ETF Hedge Fund, A DIY Strategy for Private Wealth Management, published by Wiley Finance in 2008. A detailed bio is here: Dave Fry.