Hone in on HYEM for Strong Income

HYEM is best understood as a hard-currency credit sleeve, not a broad emerging-markets bond proxy. Its benchmark focuses on dollar-denominated corporate issuers, which means the fundโ€™s behavior is driven as much by issuer credit quality and sector mix as by country headlines. For investors comparing EM debt options, that distinction matters because it changes where the risk is actually coming from.

The index construction also shapes the portfolioโ€™s credit profile. A corporate-only universe tends to look different from sovereign or local-currency EM debt, with exposure concentrated in companies that can access global funding markets. That can make the ETF a useful complement to other EM allocations, but it also means diversification is limited by how the benchmark defines โ€œemerging marketsโ€ and which issuers qualify at each rebalance.

Another practical question is how HYEM fits inside an income allocation. It is not simply a substitute for U.S. high yield or core bonds; it sits in a separate bucket where credit spread risk, country sensitivity and issuer selection interact. That can be helpful for portfolio construction, yet investors should avoid assuming that all bond ETFs behave the same when rates rise or when credit conditions tighten.

For long-term allocators, the more durable takeaway is to think in terms of role: income source, diversification tool, or EM growth companion. HYEM may serve one or more of those functions, but the fit depends on how much additional complexity an investor wants in exchange for a different mix of credit and geographic exposure.

At a time of weakness for broad domestic fixed income strategies, many investors may be pensive about international bonds, let alone high-yield emerging markets corporates. Thatโ€™s understandable, but a deeper examination is merited because there is potential for pleasant surprises. Take the case of theย VanEck Emerging Markets High Yield Bondย ETFย (HYEMย A-).
HYEM, which follows theย ICEย BofA Diversified High Yield US Emerging Markets Corporate Plus Index, holds dollar-denominated, junk-rated bonds issued by emerging markets companies. Sure, that sounds risky, butย HYEMย has been less volatile over the past three years than the most widely observed gauges of domestic high-yield and investment-grade corporates. Owing to the Federal Reserveโ€™s recent rate-tightening campaign,ย HYEMย outperformed the Bloomberg U.S. Aggregate Bond Index by nearly 600 basis points over the past three years. That coupled with the exchange traded fundโ€™s tantalizing 30-dayย SECย yield of 7.71% are sources of allure, but thereโ€™s more to theย HYEMย story.

HYEM Has Benefits

Due to the perception that emerging markets corporates, regardless of credit quality, are riskier than U.S. equivalents, advisors and investors are right to question what benefits a fund likeย HYEMย offers. Fortunately, the list ofย HYEMย perks is extensive. โ€œInvesting in high yield EM corporates can provide several benefits within a broader high yield portfolio, including yield pickup, higher quality, and diversification benefits,โ€ย according to VanEck research. Indeed, emerging markets junk corporates, broadly speaking, sport higher yields than other forms of developing world debt, including dollar-denominated sovereigns and local currency bonds. Typically, higher yields are a symptom of investors demanding more compensation for lower credit quality, but underscoring another benefit ofย HYEMย is the point thatย ETFย isnโ€™t excessively risky on the credit front. โ€œFurther, compared to U.S. HY bond issuers, EM HY corporate bonds have a higher tilt to BB-rated bonds and conversely, a lower exposure to single B andย CCCย issuers. In addition, high yield EM issuers have historically exhibited lower levels of leverage (given their higher spreads), which translates to a higher spread per unit of leverage,โ€ added VanEck. Another perk associated withย HYEMย is that by implementing theย ETFย into a portfolio that includes emerging markets stocks, asset allocators can reduce some of the risk associated with the latter asset class while still levering clients to growth stories. โ€œMoreover, HY EM corporates can serve as a complement to EM equities, offering potentially lower volatility and a different risk-return profile. Alongside an EM equity allocation, EM corporate bond exposure can allow investors to capture EM growth opportunities while generating attractive income and lowering the volatility of an overall EM allocation,โ€ concluded VanEck.
https://etfdb.com/tactical-allocation-channel/strong-income-look-hyem/

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