High-yield bond exchange traded funds are back in style this year as highlighted by inflows to some of the group’s more notable constituents.
Amid a record start to the year for inflows to fixed income ETFs, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK), the largest junk bond ETFs, among the 10 best asset-gathering ETFs. [Record Inflows to Bond ETFs]
Those are the big-name junk bond funds, but there are other compelling opportunities in this space, including the Market Vectors Fallen Angel High Yield Bond ETF (NYSEArca: ANGL). Fallen angel bonds, debt that was once rated investment-grade but was later downgraded to junk status have outperformed traditional high-yield bonds last year as measured by the BofA Merrill Lynch US Fallen Angel High Yield Index (H0FA) and BofA Merrill Lynch US High Yield Master II Index (H0A0), respectively. [Junk Bond ETF Dodges Energy Risk]
Since coming to market nearly three years ago, ANGL has topped HYG and the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD), confirming that fallen angel bonds offer opportunities for income and capital appreciation.
“Fallen angel bonds seem to come into their own in times of relative strains in high yield markets as the ANGL proved much more resilient to the recent pullback seen among high yield bonds, evident by the fact that ANGL fell by just half the margin seen in the HYG, which fell by over 6% between August and December of last year,” according to Markit.
A big part of the reason ANGL remained durable during the pullback in high-yield over that period was the ETF’s energy weight, or lack thereof. In mid-December, ANGL’s energy sector weight was just 4.6% compared to the 15% to 20% range found with other high-yield bond ETFs.
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]
“Falling from the elysian heights of the credit world does create some opportunities for investors however, as bonds which have lost their investment grade status have gone on to outperform both investment grade and high yield benchmarks over the last couple of years,” adds Markit.
Investors are not required to make a significant yield sacrifice to embrace ANGL’s benefits, including the superior credit quality. The ETF has a 30-day SEC yield of 4.66%, less than 50 basis points below HYG and 260 basis points above 10-year Treasury yields.
Market Vectors Fallen Angel High Yield Bond ETF
