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New ETFs Offer Bond Investors Higher Yields

Three recent exchange-traded funds from Van Eck give yield-hungry investors bets on emerging markets, foreign currency and fallen angels.

With banks underwriting the fewest number of bonds since 2005 and sovereign bond issues being judged way too hot to touch, Van Eck Global believes that exchange-traded funds investing in existing corporate bonds could fill a void for investors in search of yield.

The fund provider recently introduced three Market Vectors high-yield corporate bond ETFs in the space of a month. First came the Market Vectors International High Yield Corporate Bond Fund (IHY), which seeks to replicate the index of below-investment-grade securities held by the BofA Merrill Lynch Global Ex-U.S. Issuers High Yield Constrained Index.

Van Eck followed IHY with the release of Market Vectors Fallen Angel High Yield Bond ETF (ANGL), which holds only U.S. corporate debt that was investment grade when the bonds were issued. It will try to replicate the BofA Merrill Lynch U.S. Fallen Angel High Yield Index.

Van Eck followed the ANGL fund a few weeks later with Market Vectors High Yield EM Bond Fund ETF (HYEM), its 49th ETF. Denominated in U.S. dollars, HYEM uses as its benchmark the BofA Merill Lynch High Yield U.S. Emerging Markets Liquid Corporate Plus Index.

Van Eck believes its new fund offerings aren’t just timely because of the paucity of new bond issues. Market Vectors’ portfolio manager Francis Rodilosso told reporters on a launch call that fallen angels have better liquidity than some high-grade borrowers because their “structure was healthier to begin with.”

But Van Eck says fallen angels also compare favorably to original high-yield issues. The average market cap for ANGL’s HOFA index was nearly three times that of the BofAML Original Issue High Yield Index, average sales were nearly four times higher, and debt-to-equity was lower.

As for the emerging markets global high-yield fund, Van Eck expects strong demand because the first developing-economy bonds to come to market in the nineties were only investment grade. “Not until 2006 did the market open up to global high-yield issuers,” Rodilosso told reporters on the call for the HYEM launch. A five-year rally followed.

Van Eck expects the third ETF, IHY, to appeal to investors that want to bet on currencies, since the bonds in the fund are held in U.S. and Canadian dollars, euros, and British pound sterling. The craft is in knowing “where and how to time it,” Rodilosso said.

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