Fallen Angel ETF Could get Some new Holdings

With commodities prices under pressure, the Market Vectors Fallen Angel High Yield Bond ETF (NYSEArca: ANGL) could see its lineup grow as some corporate bonds shed investment-grade status.

Energy and materials issuers have $160 billion of bonds under review by Moody’s Investors Service and Standard & Poor’s for possible downgrade to junk territory, reports Sridhar Natarajan for Bloomberg. More than $10 billion worth of bonds have recently joined Bloomberg’s high-yield index after coming to market as investment-grade issues, according to the news agency.

ANGL applies a sampling methodology to the BofA Merrill Lynch US Fallen Angel High Yield Index (H0FA). Fallen angel bonds are those bonds that come to market rated investment-grade but are later downgraded to junk.

These corporate bonds have their advantages. Due to the once upon a time investment-grade status of its holdings, ANGL’s profile is tidier than other high-yield bond ETFs with nearly three-quarters of the fund’s weight rated BB. [An Angelic ETF for Junk Bonds]
“The ‘reduce exposure’ mentality reverses very quickly after the average issuer falls into the high-yield universe. Specifically, we see positioning stability begin to emerge about one week after the downgrade, and within two weeks we begin to see more client buys than sells,” said Citigroup of fallen angels in a recent note obtained by Barron’s.

While it is not guaranteed that ANGL’s lineup will balloon with the flood of new fallen angels from the energy and materials sectors, notable is the fact that the ETF’s light allocation to energy issues helped the fund remain somewhat solid compared to more traditional junk bond ETFs during last year’s tumble in oil prices. [Endorsing the Fallen Angel ETF]

ANGL currently allocates 7.2% of its weight to energy debt and 15.5% to the materials sector, according to Market Vectors data. The ETF has a 30-day SEC yield of 4.68% and an effective duration of 5.77 years.