Van Eck Launches Int'l Corp. Junk-Bond ETF
April 03, 2012
Van Eck Global, the fund manager behind the Market Vectors family of ETFs, today rolled out an exchange-traded fund that serves up exposure to international corporate high-yield bonds—a relatively unexplored segment of investing that offers higher yields—and lower default rates—than similar U.S.-issued debt.
The Market Vectors International High Yield Bond ETF (NYSEArca: IHY) tracks a BofA index comprising below-investment-grade corporate debt issued by companies in various countries including the emerging markets—the latter representing roughly a third of the portfolio's 1,000-plus debt issues.
IHY has a net annual expense ratio of 0.40 percent, which includes a fee waiver of 0.13 percent that will remain in effect at least through Sept. 1, 2013.
The fund is a tool for investors who are looking for income in an economic environment still marked by low interest rates that have prevailed since the stock market crashed in 2008. Most yield-seeking investment strategies still favor U.S. debt, but that is changing. IHY focuses on international issuers that may be poised for more growth than companies in the U.S. today.
Helping underpin that international high-yield corporate bond market is the fact that many companies outside the U.S.—especially in Europe—have been shifting their financing sources since the credit crisis, turning to debt issuance rather than to leveraged loans as a way of financing operations.
That trend has helped international corporations chip away at the U.S. dominance in the realm of corporate debt issuance, going from representing only 10 percent of the global high-yield corporate bond market to 35 percent in just over a decade, according to data provided by Market Vectors.
If nothing else, international corporate junk bonds as a segment have historically shown more correlation to equities than to other bond asset classes, making IHY a tool with which to diversify a bond portfolio.
“Our research shows that for many investors, the current allocation to corporate high-yield debt may miss as much as 35 percent of the global high-yield market,” Market Vectors' Marketing Director Ed Lopez said in a press release. “That underexposure may be especially important as international corporate high-yield bonds currently offer higher yields as well as historically lower default rates than similar debt instruments issued in the U.S.”
Strength In Numbers
The index underlying IHY had at the end of March an average yield-to-worst—or the worst yield an investor can expect to get given possibilities such as the recall of a bond issue before it matures—of just over 8.3 percent. That compares to 7.1 percent for an equivalent U.S. debt benchmark, Market Vectors data showed.
From a regional perspective, European and emerging market corporate high-yield bonds have also shown lower default rates—a median of 1.75 percent and 1.55 percent in the last 30 years, respectively—than similar U.S. debt, which comes in with default rates of 3.64 percent in the same time period, the company said.
About a third of the portfolio comprises bonds with five to seven years to maturity, and some 60 percent of the mix is tied to “BB”-rated debt. Nearly three-quarters of the portfolio is linked to the industrials sector, and 20 percent is tied to financials, with utilities rounding out the mix.
All the bonds in IHY are issued in U.S. or Canadian dollars, British pounds or euros. Eligible credits must have a fixed coupon schedule and a minimum amount outstanding of $100 million, 100 million euros, 50 million pounds or C$100 million. The fund expects to see dividends monthly.
IHY brings the Market Vectors’ roster of ETFs to 46 funds, with more than $23.7 billion in assets under management, making it the fifth-largest family of ETFs in the U.S. today.