December 20, 2011 / 11:14 PM / 7 years ago

From emerging markets to Europe: Van Eck plans euro ETF

NEW YORK (Reuters) - Van Eck Global, a fund manager with wide experience in emerging markets, is preparing to debut in another risky sector it bets will offer competitive returns in 2012 — Europe’s high-yield corporate debt market.

Van Eck plans to launch in mid-January an exchange-traded fund that will invest in high-yield corporate bonds issued in euros or British pounds — the first ETF of that type to be listed in the United States.

It is a risky bet — Fitch Ratings forecasts defaults among European high-yield issuers will rise in 2012 as a stagnating economy reduces corporate revenues. Banks are also poised to cut credit lines to companies, forcing them to pay higher yields to refinance in tighter capital markets.

But demand for the new ETF should come both from investors with a positive longer-term view on the market and from those interested in selling those bonds short, Van Eck director Edward Lopez told Reuters in an interview.

He said spreads between European high-yield bonds and benchmark government rates serve as a gauge for measuring performance of the bonds.

“Historically, when spreads exceeded 1,000 basis points, in the years following the returns for those bonds have been positive,” said Lopez, pointing to a graph that shows spreads recently crossed the 1,000 basis point threshold again.

In 2010, about one year after spreads widened to more than 2,000 basis points following the global financial crisis, returns on European high-yield corporate bonds jumped to over 100 percent in a 12-month rolling period basis, according to an index calculated by Bank of America Merrill Lynch.

The index — known as European Currency High Yield Constrained — will be the benchmark for Van Eck’s new ETF. It currently includes only bonds issued by companies from investment-grade countries, but Lopez believes that rule “is going away in the new year.”

Returns are expected to be attractive in 2012 as long as Europe does not slip back into recession, said Lopez.

“If the economy just muddles along, with growth at single digit and equities not doing anything, I think high-yield debt will look interesting,” he said.

But even if a possible recession sends bond prices down, the ETF could still prove to be a useful tool for investors trying to hedge their positions, according to Lopez.

He recalled the strong investor appetite for Van Eck’s Egypt ETF (EGPT.P) right after the country’s stock market reopened following a month-long halt triggered by the popular uprising that toppled Hosni Mubarak.

Even as stocks fell, assets in the Egypt ETF managed by Van Eck jumped to $12 million from $7 million in a few days “because people were willing to trade that event,” said Lopez.

“We would suspect there would be appetite for trading the European events as well.”

Reporting By Walter Brandimarte; Editing by Leslie Adler

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