“Fallen angel bonds outperform for a number of reasons. First, since the bonds were once investment grade, issuers tend to be larger, more established companies. Secondly, fallen angel debt generally exhibit higher average credit rating than the broader high yield market, which could give an additional element of stability in times of stress. Third, indiscriminate selling pressure on debt that is downgraded to junk status may cause the bonds to be oversold, which could present a good buying opportunity. Fourth, since many bonds are BB-rated, if they do regain investment grade status, this could provide a catalyst for outperformance as bond managers buy back in,” according to a Seeking Alpha analysis of ANGL.
Earlier this year on the webcast Fine Tune Your High Yield Strategy with ETF Trends, said that fallen angel bonds offer a potential value play as the debt securities typically experience a steep sell-off from institutional forced selling prior to being added to the fallen angels group. Looking ahead sector themes can help support potential price appreciation. Additionally, the groups’ higher average credit quality can help diminish market volatility.
Related: A Smart-Beta, High-Yield ETF Strategy for Quality
Relative to the broader high-yield market, fallen angels have historically included greater concentration of higher quality or BB-rated speculative-grade bonds.
VanEck Fallen Angel High Yield Bond ETF
