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If the Federal Fund rates are above 5%, it’s worth revisiting one of our portfolio diversification favorites, the VanEck Emerging Markets High Yield Bond ETF().NYSEARCA:HYEM) has been discussed here before.vehicle is replaced A trade fund focused on high yields in emerging markets rather than US Treasuries:
The VanEck Emerging Markets High Yield Bond ETF (HYEM) replicates as closely as possible the price and yield performance of the ICE BofA Diversified High Yield US Emerging Markets Corporate Plus Index (EMLH) before netting any fees and expenses. I am aiming for USD-denominated bonds issued by non-sovereign emerging market issuers rated below investment grade and issued in major domestic and eurobond markets.
Investors gain USD exposure to emerging market companies rated as junk.No currency risk There were risk factors here that would hurt local currency funds (against a strong dollar). The fund is essentially a high-yielding beta when compared to its US counterpart, the SPDR Bloomberg High Yield Bond ETF (JNK):
Fund Analytics (Author)
From the table above, we can see that HYEM experienced a larger drawdown in the 2022 market downturn with a higher standard deviation compared to JNK. Higher beta names tend to show larger price movements, both down and up. As such, HYEM has outperformed for the last 12 months since his October drawdown.
Compared to JNK, we can see that while the fund lost more in October, it rose faster on the back of a recovery from spread tightening.
How to trade HYEM
HYEM is an excellent high-yield diversification vehicle as it introduces global economic flows into its portfolio. However, this fund is not a true buy and hold vehicle. This is a cyclical product that needs to be bought during recessions and sold when the economy is at full blast. Given the sharp rise in risk-free interest rates, the stock’s yield (30-day SEC yield) is now close to 9%.
30 Day SEC Yield (Morningstar)
With interest rates this high, the fund looks very attractive from a pure yield standpoint, but its main risk factor is represented by current credit spreads. We are in an extremely greedy environment and expect some kind of credit event at some point this year to send the VIX skyrocketing. An event of this kind would have a huge impact on HYEM.
However, this kind of event is also the best entry point into the fund. After this cycle, risk-free rates will not be this high for some time. At the same time, some countries representing large exposures to funds will also be on the mend. And here we are thinking of China, which many consider to be in crisis. recession.
We’re going to lighten our exposure a bit here, but we’re going to keep our core allocation to HYEM, set a net target allocation, and jump on that name during the market’s next risk-off event.
Holdings
The Fund’s primary exposures are to the following jurisdictions:
Country exposure (fund factsheet)
As discussed above, China is probably in recession and its real estate sector hit hardest. Turkey has gone through a tough election cycle and is now significantly devaluing its state. currency By returning to sounder monetary policy. Credit exposure in these jurisdictions will once again outperform as both countries enter a sustained economic recovery.
The fund’s primary sector exposure is represented by its financial position.
Sector (fund factsheet)
Despite reservations about some US regional banks, we believe emerging market banks would be better off with an implicit government backstop, especially for systemically important institutions. The failure of financial institutions will only exacerbate existing economic problems and is unacceptable. The Bloomberg article on Chinese banks is very interesting because it says:
A Chinese state-run newspaper published a rare counter-argument to a Goldman Sachs Group survey after Goldman Sachs Group Inc. securities analysts recommended selling local bank stakes, which was a slowing economy. It is the latest sign of the authorities’ attempt to counter the negative market sentiment that has followed.
Markets should not be bearish on Chinese banks based on pessimistic assumptions, negative assumptions are a misunderstanding of the facts, according to the Securities Times report Friday, see Tuesday’s survey Note from Goldman. Banks are actively reducing their exposure to real estate lending risks, and local governments are stepping up efforts to reduce debt risks, according to the Securities Times.
Despite the current pullback, we are long-term bullish on energy stocks. We believe the sector has made significant progress in refining its balance sheet and optimizing capital spending, and we believe the transition to clean energy will take much longer than expected.
Conclusion
HYEM is an exchange-traded fund. This instrument focuses on dollar-denominated emerging market government bonds. The name stands for excellent portfolio diversification when it comes to high yield, adding international exposure and higher credit spreads. This fund performs similar analysis to the well-known US-focused fund (JNK), but exhibits higher beta values. The name is cyclical play rather than buy and hold. We like HYEM’s all-in yield, but are concerned about a market risk-off event in the second half.we will possession The stock has been spotted as a core holding and a buying eye for higher targets against the backdrop of a risk-off event.
