Popular Fallen Angel Bond ETF Tries to Assuage Liquidity Concerns

A fallen angel, speculative-grade junk bond exchange traded fund will be implementing a rule change to increase exposure to more liquid debt securities.

According to VanEck, the VanEck Fallen Angel High Yield Bond ETF (NYSEArca: ANGL), which tracks the BofA Merrill Lynch US Fallen Angel High Yield Index, will execute a rule change on September 30 to raise the minimum amount of outstanding permissible for each bond issue from $100 to $250 million. Consequently, about 7.4% of its current index will be shed.

“We see this as a positive move that should help improve the overall liquidity of the index’s universe while imposing relatively minimal impact on potential performance and composition,” Meredith Larson, Product Manager, VanEck Vectors ETFs, said in a note.

The changes come as the industry faces increased scrutiny on potential liquidity issues in bond-related ETFs, especially as we face a rising interest rate environment.

Some observers have warned that after the plunge in yields and rising popularity of fixed-income ETFs, these bond ETFs that track illiquid debt securities could find it difficult to redeem shares in the event of a major sell-off if interest rates were to suddenly rise. Many argued that while liquidity seems ample during normal conditions, liquidity can dry up during volatile markets.