High-Yield Bonds Have Their Day in the Sun

Investors interested in the high-yields of junk bonds but are wary of potential credit risks can turn to a group of “fallen angels” bond-related exchange traded fund (ETF).

On the upcoming complimentary webcast this Thursday, Fine Tune Your High Yield Strategy, Francis Rodilosso, Portfolio Manager at VanEck, will help explain the group of fallen angels speculative-grade debt and the potential higher risk-adjusted returns that the asset category offers.

With the junk bond market facing heightened default risks ahead, investors may be wary of speculative-grade debt. According to Moody’s Investor Service, default rate for all rated corporate issuers is expected to rise to 2.1%, a post-financial crisis high, from 1.7% in 2015.

Related: Rising Corporate Defaults Could Keep a Lid on Junk Bond ETFs

Among the trouble spots, energy and materials sectors stood out. In 2015, metals and mining sector had the highest default rates at 6.5%, followed by oil and gas at 6.3%. Moody’s now expects U.S. default rates to rise to 11.5% for metal and mining companies and to increase to 10.3% for oil and gas. As commodity prices continued to fall off, Fitch Ratings calculated that energy high-yield defaults jumped to a record 13%, surpassing the previous 9.7% high in 1999.


Consequently, given the heightened credit risk, fixed-income investors may consider junk bond funds that lean toward higher quality debt. For instance, the VanEck Fallen Angel High Yield Bond ETF (NYSEArca: ANGL) tracks so-called fallen angel speculative-grade rated debt, or debt securities that were initially issued with an investment-grade rating but were later downgraded to junk territory.