Fallen Angel ETF Still Has Income Allure | ETF Trends

With credit markets steadying with some assistance from the Federal Reserve and Treasury yields still low, the VanEck Vectors Fallen Angel High Yield Bond ETF (NASDAQ: ANGL) remains a relevant consideration in a low-yield environment.

ANGL seeks to replicate as closely as possible the price and yield performance of the ICE BofAML US Fallen Angel High Yield Index. The index is comprised of below investment grade corporate bonds denominated in U.S. dollars that were rated investment grade at the time of issuance.

At a time when quality is increasingly relevant in the corporate credit space, the status of ANGL holdings as formerly investment-grade bonds is relevant.

“Fallen angel high yield bonds are part of the overall high yield universe but unique in that they were originally issued with investment grade ratings and later downgraded to non-investment grade, or high yield,” according to VanEck.

Quality Matters with ANGL

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. The higher average quality also helped absorb some of the market volatility witness earlier this year. ANGL’s elevated credit quality relative to traditional junk bond strategies can also lead to long-term outperformance.

“The outperformance of fallen angel high yield bonds versus the broad high yield market has historically been driven by the systematic buying of oversold and undervalued bonds, differentiated sector exposure, and a higher average credit quality,” notes VanEck.

Fixed-income investors jumped at junk bond ETFs after the Federal Reserve said it could begin purchasing speculative-grade debt to support the market, but ETF investors may be looking at the wrong area. The Fed directed a sizable portion of its junk bond-buying spree to fallen angels, including purchases of ANGL. That’s just one more in a long line of benefits ANGL offers investor over standard high-yield corporate bond ETFs.

“Fallen angels stand apart from original-issue high yield bonds, offering a higher quality, high yield bond strategy that has historically outperformed the broad high yield bond market, including actively managed funds,” notes VanEck. “Fallen angel high yield bonds, historically, tend to be issued by larger, more established companies, have a higher rate of upgrades to investment grade and offer a contrarian approach to investing in bonds exposed to heavy selling.”

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.