Summary
- EMHY provides exposure to emerging market high yield sovereign and corporate bonds.
- It pays a trailing 7.0% distribution yield.
- However, with U.S. short-term treasuries yielding 4%+, risky emerging market high yield bonds has diminishing appeal.
The iShares J.P. Morgan EM High Yield Bond ETF ( EMHY ) provides exposure to emerging market sovereign and corporate high yield bonds. Although the ETF provides a high distribution yield of 7.0%, I believe that yield is less attractive now that domestic short-term treasuries are yielding 4%+. Furthermore, historically, the EMHY has underperformed domestic high yield bonds.
Fund Overview
The iShares J.P. Morgan EM High Yield Bond ETF provides exposure to emerging market high yield sovereign and corporate bonds. The EMHY ETF tracks the J P Morgan USD Emerging Markets High Yield Bond Index ("Index"), an index that measures the performance of below investment-grade U.S. dollar-denominated emerging market debt securities issued by sovereign, corporate, and quasi-sovereign entities. Corporate securities needs to have at least $500 million in face value and 2.5 years to maturity to be considered, while sovereign and quasi-sovereign instruments need to have at least $1 billion in face value outstanding.
The EMHY ETF is a relatively small fund with only $340 million in assets and charges a 0.50% expense ratio.
Portfolio Holdings
Figure 1 shows the EMHY ETF's portfolio characteristics. The fund has 693 holdings with an effective duration of 4.9 years and an average yield to maturity of 9.7%.
Geographically, the fund is most exposed to Brazil (13.3%), Turkey (12.8%), Mexico (8.3%), Colombia (6.5%), and China (4.1%) (Figure 2).
48.4% of EMHY's portfolio is sovereign debt, with another 16.3% allocated to quasi-sovereign agency debt. Industrials (21.0%) and Financials (11.7%) are the other large sector weights (Figure 3).
Returns
Figure 4 shows EMHY's relatively poor historical average annual returns. EMHY has 3/5/10Yr average annual returns of -3.0%/-0.3%/1.9% to January 31, 2023.
EMHY's poor historical returns is primarily driven by a tough asset class. Relative to the Morningstar category Emerging Markets Bond , EMHY has outperformed on 3/5/10Yr returns, although it also has above category volatility (Figure 5).
Distribution & Yield
EMHY pays a high monthly distribution with a trailing 12 month distribution of $2.47 or 7.0% trailing yield (Figure 6).
Historically, EMHY's distribution yield has ranged between 5 to 7%, which was quite attractive compared to domestic treasuries that yielded ~2% (Figure 7).
However, with short-term treasuries now yielding over 4%, the relative attractiveness of products like the EMHY have been diminished (Figure 8).
Are Emerging Market Risks Worth It?
Comparing between the EMHY ETF and the iShares iBoxx $ High Yield Corporate Bond ETF ( HYG ), investors should ask themselves whether the additional emerging market risk is worth it? For example, looking at figure 9 below, we can see that domestic high yield bonds, as measured by HYG's average annual returns, have outperformed EMHY's returns on all time-frames.
Conclusion
The EMHY ETF provides exposure to emerging market sovereign and corporate high yield bonds. Although the ETF provides a high distribution yield of 7.0%, I believe that yield is less attractive now that domestic 'credit-risk free' treasuries are yielding 4%+. Furthermore, if we look at historical returns, investors have not been rewarded for bearing the additional 'emerging market' risk of the EMHY ETF compared to domestic high yield bonds in the HYG ETF.
For further details see:
EMHY: Not Worth The Risk