The VanEck Fallen Angel High Yield Bond ETF (NYSEArca: ANGL), which tracks the BofA Merrill Lynch US Fallen Angel High Yield Index, is establishing some favorable traits. Those include proficiency at adding assets and, more importantly, out-performance of traditional high-yield corporate bond exchange traded funds.
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.
The fallen angel ETF 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.
“Fallen angels can be a source of higher quality high yield for investors, given about 77% of the universe was concentrated in BB-rated bonds (just one ratings notch below investment grade) as of April 30, 2017,” said VanEck in a recent note. “This compares to the broader high yield bond universe’s 48% concentration in BB-rated bonds. Furthermore, this higher average credit quality has been accompanied by more attractive rising star and default rates, historically.”
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.
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.
“The volume of fallen angel bonds in the market is increased primarily by deteriorating fundamentals of individual investment grade bond issuers and by economic events that have weakened entire industry sectors (as seen in early 2016 in the energy sector with the aftermath of the 2014 oil price collapse),” said VanEck. “While negative events can help to broaden the fallen angel universe, they also present potential opportunities for investors to pick up discounted credits. By adopting a passive fallen angel index approach, as offered by ANGL, investors are following a contrarian investment allocation by effectively buying into the market while others are selling out. While not always the case, overselling pressure on investment grade bonds prior to being downgraded to high yield status has helped uncover value, on average, in the fallen angel high yield subset.”
For more information on fixed-income assets, visit our bond ETFs category.