Fund flows can help indicate investors’ penchant for certain ETFs when it comes to bonds and right now, it’s high yield for ETF provider VanEck.
One reason could be the falling default rates. Thanks to this risk-reward ratio, investors may be opting for more high yield given the risk of default is lower.
“High-yield default rates have dropped for three straight quarters, sitting at 4.9% at the end of the first quarter. The rate was 2.9% in the year-ago period, but late in that quarter, COVID-19 forced governments to act,” a Pensions & Investments article noted.
“Fitch Ratings Inc. predicts the overall default rate will fall to 2% this year,” the article added.
A Different “ANGL” on High Yield
At the top of the heap is the VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL). ANGL seeks to replicate as closely as possible the price and yield performance of the ICE BofAML US Fallen Angel High Yield Index, which is comprised of below investment grade corporate bonds denominated in U.S. dollars that were rated investment grade at the time of issuance.
The fund focuses on debt that has fallen out of investment-grade favor and is now repurposed for high yield returns with the downgraded-to-junk status.
ANGL gives investors:
- Higher-Quality High Yield: Fallen angels, high yield bonds originally issued as investment grade corporate bonds, have had historically higher average credit quality than the broad high yield bond universe
- Outperformance in the Broad High Yield Bond Market: Fallen angels have outperformed the broad high yield bond market in 12 of the last 16 calendar years
- Higher Risk-Adjusted Returns: Fallen angels have historically offered a better risk/reward trade off than found with the broad high yield bond market
Emerging Markets and Munis
Next up is the VanEck Vectors EM High Yield Bond ETF (HYEM). HYEM seeks to replicate the ICE BofAML Diversified High Yield US Emerging Markets Corporate Plus Index, which is comprised of U.S. dollar-denominated bonds issued by non-sovereign emerging market issuers that have a below investment grade rating and that are issued in the major domestic and Eurobond markets.
HYEM gives investors:
- Focuses solely on the non-sovereign segment of the high yield emerging markets bond market
- Currently has lower average duration compared to high yield U.S. corporate bonds
- Boasts lower historical default rates than high yield U.S. corporate bonds
Finally, there’s the VanEck Vectors High Yield Muni ETF (HYD). The fund seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Bloomberg Barclays Municipal Custom High Yield Composite Index.
The index is comprised of publicly traded municipal bonds that cover the U.S. dollar-denominated high yield long-term tax-exempt bond market.
HYD gives investors:
- A High-Yield Muni Focus: Underlying Index comprised of highest-yielding municipal bonds with income generally exempt from federal taxes
- Enhanced Liquidity Features: Index includes 25% BBB investment-grade exposure for enhanced liquidity
- Diverse Sector Exposure and Low Default Rates: Index covers a wide range of muni sectors and securities with historically low default rates
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