This EM Bond ETF's Luck Can't Get Any Worse, Can It?

At least for the moment, it is fair to say emerging markets bonds are "so 2012" and it really does not matter if one is talking about the dollar-denominated variety or local currency bonds.

Amid plunging currencies and heightened fears the Federal Reserve is looking to end quantitative easing, investors have scampered out of emerging markets bond ETFs at almost break-neck speed in recent weeks.

Since the start of May, the iShares J.P. Morgan USD Emerging Markets Bond Fund (NYSE:EMB),the PowerShares Emerging Markets Sovereign Debt Portfolio (NYSE:PCY) and the Market Vectors Emerging Markets Local Currency Bond ETF (NYSE:EMLC) have lost over $1 billion in assets combined, according to Index Universe data.

On emerging markets bond ETF that has yet to be hit by the outflow virus is the iShares Emerging Markets High Yield Bond Fund (NYSE:EMHY). No, this is not a misprint, but EMHY has seen INFLOWS of almost $5.5 million since early May.

EMHY started to rally last year and kept those good times going into the first quarter on expectations that Turkey and the Philippines would receive investment-grade credit ratings, thereby increasing the value of the junk debt that comprises the fund's lineup. Nearly two-thirds of EMHY's holdings are rated between BBB- and B- on the Standard & Poor's ratings scale, according to iShares data.

Ratings agency have elevated both Turkey and the Philippines to investment-grade territory, but the market is focusing on more important issues at the moment, such as violent anti-government protests in Turkey and a rapidly falling Philippine peso.

Still, investors have stuck by the ETF even as the headlines have grown more challenging. Turkey and the Philippines are not afterthoughts in this ETF. Rather, the two combine for over 26 percent of EMHY's country weight.

As if that is not bad enough for EMHY, the ETF was hit with more bad news Monday when S&P lowered Venezuela's credit rating to B from B+. Venezuela is EMHY's second-largest country weight at 14.7 percent.

To its credit, EMHY actually gained after that news crossed the wires, which is not all that surprising given the ETF's history of proving sturdy in the face of bad news out of Venezuela. Investors wonder when EMHY might tumble as all this bad news mounts. Turkey, Venezuela and the Philippines represent over 40 percent of the ETF's weight. Common sense and simple math dictate that bad news cannot keep mounting in those countries without leading to, at

Then again the aforementioned scenarios are enough to make investors wonder when EMHY might tumble as all this bad news mounts. Turkey, Venezuela and the Philippines represent over 40 percent of the ETF's weight. Common sense and simple math dictate that bad news cannot keep mounting in those countries without leading to, at best, outflows for EMHY, and at worst, share price retrenchment.

As one last noteworthy tidbit, it is worth acknowledging that the yield premium investors demand to hold Lebanon's $34 billion of dollar debt over U.S. Treasurys climbed 33 basis points in the past four weeks to 464 on June 11, here.