When it comes to junk-rated corporate debt and related ETFs, many advisors and investors are content to stick with domestic fare, thinking high yield corporates issued by ex-U.S. firms carry added risk. Among individual issues, there are examples of Asia high-yield corporates that are riskier than domestic equivalents.
But that doesn’t mean the asset class should be ignored outright. For investors looking to ratchet up income profiles while increasing geographic diversification, the KraneShares Asia-Pacific High-Income Bond ETF (KHYB) could be a compelling option.
Confirming there is opportunity with high yield debt courtesy of Asia corporate issuers, KHYB is beating the widely followed Markit iBoxx USD Liquid High Yield Index by almost 160 bps since the start of 2024. More upside could be on the way. That’s because global investors are embracing Asia’s high yield debt outside the Chinese real estate space.
With KHYB, Active Management Shines
KHYB is subadvised by Nikko Asset Management Americas. Active management could serve investors well in this case. That’s because the fund’s managers can steer clear of risky Chinese property bonds while focusing on credit opportunities and potentially reducing default risk. Speaking of default risk, outside of Chinese real estate bonds, the Asia-Pacific junk corporate picture is relatively appealing.
“The credit cycle for Asia high yield is in its recovery phase, as fundamentals for Asian credit remains supportive. Although defaults have up to this point been driven by Chinese property issuers, which were far ahead in the downturn of the credit cycle, default rates for the rest of Asia ex China remain at healthy levels, and at below forecasted levels for US high yield (HY),” said KHYB portfolio manager Wai Hoong Leong in a recent question-and-answer session with KraneShares.
Under any circumstances, KHYB’s risk reduction efforts are noteworthy. But that’s amplified when considering the ETF’s 30-day SEC yield of 7.50%. That’s slightly higher than what investors find on the Markit iBoxx USD Liquid High Yield Index.
Another point in the ETF’s favor is that it’s not dedicated to China bonds. The country is one of the world’s largest issuers of corporate debt. Yet there are other compelling junk bond opportunities in the Asia-Pacific region. Some of those are accessible via KHYB.
“Meanwhile, macroeconomic and corporate credit fundamentals across Asia ex-China have been resilient and default rates are low. Countries like Indonesia and India are increasingly attractive due to their large and growing economies, supportive governments and commitment to longer term fiscal sustainability. This has led to strong corporate earnings and increased demand for credit,” added Leong.
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