Amid a spate of corporate credit downgrades earlier this year, the VanEck Vectors Fallen Angel High Yield Bond ETF (NASDAQ: ANGL) took on a slew of new issues, but that the new additions to the largest fallen angel ETF aren’t restraining performance.
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.
“Fallen angel bonds, as represented by the ICE US Fallen Angel High Yield 10% Constrained Index (“Fallen Angel Index”), are outperforming the broad U.S. high yield market, as represented by the ICE BofA High Yield Index (“High Yield Index”), year-to-date by 5.23% as of July 31, 2020,” according to VanEck.
Data confirm ANGL’s new additions are helping the cause.
“This year’s new fallen angels are the primary drivers. As we have noted previously, outperformance versus the broad high yield market historically follows periods of high fallen angel volume, and this year has not been an exception,” according to VanEck.
ANGL Stands Tall
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.
Fallen angel issuers tend to be larger and more established than many other junk bond issuers. Relative to the broader high-yield market, fallen angels have historically included a greater concentration of higher quality or BB-rated speculative-grade bonds. Historically, fallen angels have outperformed the broader junk bond market.
Higher credit quality is making a difference with regards to ANGL’s new members.
“New fallen angels have been rated BB, increasing the index’s BB exposure to 92.78% vs 56.58% in the broad high yield market,” notes VanEck. “Accordingly, this year’s outperformance thus far is coming from the BB allocation, which has contributed to more than 100% of its return while other credit quality allocations have detracted performance.”
Good news for ANGL: more fallen angels could be coming.
“Given our outlook for an additional $100 to $150 billion of new fallen angels this year, we do not believe that the current cycle or the potential to outperform has run its course,” according to VanEck.
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