Emerging markets have experienced staggering growth in the past 10 years. And even though growth rates have recently slowed due to weakness in the global economy, they are still expanding at a much faster pace than developed countries like the United States, the United Kingdom and Japan.
Take Brazil for example. Even though a recent third-quarter gross domestic product (GDP) growth of 0.6% was below expectations, it is still projecting a 4% growth in 2013. That’s well ahead of the United States, which is projected to grow by a paltry 2% and far better than the 1.4% total global growth projected by the Organisation for Economic Co-operation and Development.
Other emerging markets are also expected to see big gains.
South Korea is expected to grow GDP to at least 3% in 2013, while the United Arab Emirates is expected to grow its economy to 4.6% next year. Russia, India and China are projected to reach GDP growth of 3.9%, 6.5% and 8%, respectively.
But even though emerging-market growth isn’t exactly a new thing on the Street, the way I like to invest in these countries is. In fact, my favorite investments were only available exclusively to professional and high net-worth investors just a year ago.
I’m talking about high-yielding emerging-market corporate bonds, which can now be obtained through exchange-traded funds (ETFs).
With high yields of up to 7%, emerging-market corporate bonds are way ahead of U.S. corporate bondyields of about 3.8% and more than three times the yield of the 10-year Treasury note of 1.7%. These ETFs provide investors with exposure to growing companies in emerging markets that have lower credit ratings and leveraged balance sheets. This means these companies are more susceptible to default on their loans, so their borrowing costs are high (hence their higher yields). But as these companies evolve through the natural stages of growth, their borrowing costs decline, producing big capital gains for early investors.
This translates into two things: a shot at some serious capital gains and huge yields. This is why StreetAuthority Co-Founder Paul Tracy, the face behind High-Yield International, says investors should to look overseas if they want to truly find high yields.
But it’s important to note that higher yield also comes with more risk, so the great thing about bond ETFs is that, because they hold a basket of bonds, they provide investors with a hedge against single-asset risk.
Here are my three favorite high-yielding emerging-market ETFs. All three of them were launched this year, making them a bit more attractive in terms of valuation…
1. Market Vectors ETF Trust (NYSEARCA:HYEM)
This ETF corresponds to the price and yield of the BofA Merrill Lynch High-Yield US Emerging MarketsLiquid Corporate Plus Index, an index of high-yield corporate bonds from emerging markets. With a healthy 7% yield, this ETF has a higher yield than domestic high-yield corporate bond ETFs such as the iShares iBoxx $ High Yid Corp Bond (NYSEARCA:HYG) and the SPDR Barclays Capital High Yield Bnd (NYSEARCA:JNK), both yielding about 6.8%. HYEM’s yield also beats sovereign emerging-market yields of roughly 4%.