Fallen Angel Bond ETF Is an Outperforming Fixed-Income Theme

Among fixed-income assets, fallen angel bonds and related exchange traded funds have been an outperforming theme as energy and basic industry sectors helped drive returns.

Over the past year, the VanEck Fallen Angel High Yield Bond ETF (NYSEArca: ANGL), which tracks the BofA Merrill Lynch US Fallen Angel High Yield Index, climbed 32.3%, compared to the Bloomberg Barclays US Aggregate Bond Index’s 1.2% return.

Supporting the outperformance, ANGL’s underlying index includes a hefty tilt toward energy and basic industry sectors, which have strengthened on the back of a strong rally in commodities that began in the first quarter and continued through the year, Meredith Larson, Product Manager of ETFs at VanEck, said in a note.

ANGL includes a 27.7% weight in energy and 24.8% in basic materials. Its overweight position in energy helped the ETF outperform as crude oil prices rebounded from multi-year lows back in the first quarter of 2016.

In the fourth quarter, fallen angels managed to outperform the broader high yield universe due to their energy sector overweight and healthcare sector underweight – ANGL does not include healthcare sector exposure.

“We think this marginal outperformance is noteworthy given that 5-year U.S. interest rates rose 75 basis points (bps) in the quarter,” Larson said. “The sector differentiation of fallen angels offset the relatively higher interest rate duration risk they tend to average versus broad market high yield bonds.”

ANGL has a notably longer duration of 6.29 years – duration is a measure of a bond fund’s sensitivity to changes in interest rates, so a longer duration translates to greater interest rate risk.