The Market Vectors Fallen Angel High Yield Bond ETF (NYSEArca: ANGL) did not exactly receive an endorsement, but the idea of investing in fallen angel bonds did.
Fallen angels, the bonds found in ANGL, are corporate bonds that once held investment-grade credit ratings but, due to a variety of factors, were later downgraded to junk status. 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.
Citi notes that due to the energy sector’s recent struggles, more fallen angels are on the way. There has been no confirmation that ANGL will soon see increased exposure to fallen angel bonds issued by energy firms, but noteworthy is the fact that the ETF proved durable relative to traditional junk bond ETFs during the darkest days of oil’s decline. [A High-Yield Bond ETF that Skirts Energy Risk]
ANGL, which has an effective duration of 5.76 years and a 4.6% 30-day SEC yield, has an energy sector allocation of just 4.4%. Issues from seven other sectors figure more prominently in ANGL’s lineup than do energy bonds.
“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.
As Barron’s reports, Citigroup endorses the idea of buying fallen angels soon after the bonds attain that status because the bonds have already endured the bulk of the selling pressure they will see in the weeks leading up to the downgrade.
ANGL’s recent performance underscores the sturdiness of fallen angels. Over the past 90 days, the ETF is up 2.6%, or better than triple the gain offered by the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) over the same period.
Market Vectors Fallen Angel High Yield Bond ETF
Tom Lydon’s clients own shares of HYG.