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.
[related_stories]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.
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, the group of junk bonds typically has a higher average credit quality than many other speculative-grade debt-related funds.
Related: A Smart-Beta, High-Yield ETF Strategy for Quality
ANGL’s credit qualities include low investment-grade BBB 6.5%, along with speculative-grade BB 75.8%, B 9.5%, CCC 3.7%, CC 0.1% and non-rated 2.9%.
The Fallen Angel ETF has a 0.40% expense ratio, a 6.45% 30-day SEC yield and a 5.68 year duration.
For more information on speculative-grade debt, visit our junk bonds category.
Financial advisors who are interested in learning more about high-yield, speculative-grade bonds can register for the Thursday, May 26 webcast here.