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.