After a rough and controversial year of high-yield corporate bond exchange traded funds, investors looking to remain involved in this corner of the fixed income market can identify opportunities with higher quality junk fare.
The Market Vectors Fallen Angel High Yield Bond ETF (NYSEArca: ANGL), which holds junk bonds that were rated investment-grade when issued, is an avenue for doing just that. Fallen angel issuers tend to be larger and more established than many other junk bond issuers. Furthermore, since these fallen angels were formerly on the cusp of investment-grade status, this group of junk bonds typically has a higher average credit quality than many other speculative-grade debt-related funds.
With high-yield bonds, fixed-income investors are more worried about default rates. According to Edward Altman’s 30-year history of fallen angels, this fixed-income category has shown a percentage below the average annual default rate for original-issue high-yield bonds. Original-issue high-yield bonds have somewhere around a 4.5% annual default rates on average while fallen angels are closer to 3.6%.
High-yield default rates have also remained low over the past year, or below 1%. Moreover, the ratio of fallen angels becoming investment-grade again compared to original-issue high-yield is on the rise as well.
“Recent turmoil in the high-yield credit markets, due in no small part to the commodities crash, has sent many junk bond ETFs and CEFs sliding. However, fallen angels have been able to fly relatively steady amid the turbulence in the high-yield sector,” according to a Seeking Alpha analysis of ANGL.
ANGL applies a sampling methodology to the BofA Merrill Lynch US Fallen Angel High Yield Index (H0FA). The fallen angel bond ETF may also come with an embedded value characteristic. Before being included in the BofAML US Fallen Angel Index, a debt security that has been downgraded to speculative-grade status would have already experienced significant price deterioration.
Indeed, BB debt has outperformed all credit classes within a range of both two notches above and below it since 1997, a period of nearly 20 years. The total return of BB debt over this period is 264.4%, followed by BBB (investment-grade) at 227.7%. A-rated debt ranks third at 197.1%, followed closely by CCC at 196.2%. B has done the worst at 178.1%,” adds Seeking Alpha.
ANGL is lightly allocated to CCC-rated and those bonds were among the worst junk performers last year.
Market Vectors Fallen Angel High Yield Bond ETF
