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.

We rank the top 10 ETF by our proprietary stars system as outlined below. If an ETF you're interested in is not included but you'd like to know a ranking send an inquiry to support@ETFDigest.com and we'll attempt to satisfy your interest.

 


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

We feature a technical view of conditions from monthly chart views. Simplistically, we recommend longer-term investors stay on the right side of the 12 month simple moving average. When prices are above the moving average, stay long, and when below remain in cash or short. Some more interested in a fundamental approach may not care so much about technical issues preferring instead to buy when prices are perceived as low and sell for other reasons when high; but, this is not our approach. Premium members to the ETF Digest receive added signals when markets become extended such as DeMark triggers to exit overbought/oversold conditions.

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

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