Van Eck Plans European High Yield Debt ETF

by on August 29, 2011 | ETFs Mentioned:

Van Eck, one of the pioneers of ETFs offering exposure to international bond markets, has laid the groundwork for what would be yet another first-of-its-kind fixed income fund. In a recent SEC filing, the company detailed plans for the Market Vectors European Currency High Yield Bond ETF, a fund that would offer exposure to junk bonds denominated in euros and British pounds. The proposed ETF would seek to replicate the BofA Merrill Lynch European Currency High Yield Constrained Index. According to the filing, that cap-weighted index “is designed to track the performance of euro- and British pound sterling-denominated below investment grade corporate debt publicly issued in the eurobond, sterling domestic or euro domestic markets.” Debt included in the index may be issued by European issuers or issuers located outside of Europe.

All of the existing products in the High Yield Bonds ETFdb Category focus primarily on dollar-denominated debt of U.S. issuers. That category currently includes ten ETFs with aggregate assets in excess of $15 billion.

Bond ETFs: International Expansion Underway

The last several months have seen increased interest in achieving exposure to fixed income markets beyond U.S. borders; there are now a number of ETFs that offer exposure to fixed income securities from both developed and emerging markets. Specifically, there are seven different ETFs in the Emerging Markets Bonds ETFdb Category and another seven in the International Government Bonds ETFdb Category. And recent activity on the product development front suggests that the wave of international bond ETF launches hasn’t quite peaked. Recent weeks have seen PIMCO file for ETFs focusing on bond markets of Germany, Australia, and Canada and multiple companies lay the groundwork for an ETF comprised entirely of Chinese bonds.

State Street (IBND) and PowerShares (PICB) both already offer ETFs that focus on international corporate debt. But both of those ETFs are tilted towards investment grade securities; about three quarters of PICB is rated A or higher, while almost 90% of the IBND portfolio is in debt rated higher than Baa.

While U.S. investors have long since embraced the benefits of international diversification among equity portfolios, many bond portfolios are still dominated by Treasuries and U.S. corporates. With interest rates at record lows and expected to remain depressed for at least the next 18 months, many investors have gone in search of more attractive yields elsewhere. And not surprisingly, a large number of them have embraced ETFs as the most efficient way to access this asset class.

A sampling of the yields offered by some of the more popular international bond ETFs:

  • WisdomTree Emerging Markets Local Debt Fund (ELD):Distribution yield of about 4.7%
  • Market Vectors LatAm Aggregate Bond ETF (BONO): 30 Day SEC yield of about 5.9%

The proposed high yield European bond ETF would charge an expense ratio of just 0.40%, which is cheaper than even many of the U.S.-focused products.

Disclosure: Long ELD