Consider Fallen Angel ETFs as Fed Looks Into Junk Bonds | ETF Trends

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.

Over the past week, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) attracted $103 million in net inflows and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) brought in $506 million, according to XTF data.

The junk bond ETFs gained more attention and even surged Thursday after the Federal Reserve announced it would be buying junk bonds and related ETFs.

Peter Boockvar, chief investment officer at Bleakley Advisory Group, pointed out that the Fed said most of the ETFs it will buy “will be of ETFs whose primary investment objective is exposure to U.S. investment-grade corporate bonds, and the remainder will be in ETFs whose primary investment objective is exposure to U.S. high-yield corporate bonds,” CNBC reports.

However, most of the central bank’s junk-bond intervention could be limited to “fallen angels,” or companies that were once rated investment grade but have since fallen into speculative-grade or junk-rated territory, Barron’s reports.

While the Fed may buy into ETFs that cover junk bonds, which may help explain the interest in ETFs like HYG and JNK, the Fed has stated that the “preponderance” of its $250 billion vehicles will be allocated to investment-grade ETFs and it will need to limit its leverage even more with junk-bond ETF purchases.

Alternatively, the junk bond ETFs that target the fallen angel segment has not seen as much interest. For instance, the VanEck Fallen Angel High Yield Bond ETF (NYSEArca: ANGL), which was the first ETF to provide exposure to “fallen angel” bonds, only saw $7.6 million in net inflows over the past week. Additionally, iShares U.S. Fallen Angels USD Bond ETF (NASDAQ: FALN), which tracks the Bloomberg Barclays US High Yield Fallen Angel 3% Capped Index composed of U.S. dollar-denominated high yield corporate bonds that were previously rated investment grade, saw no change in flows in the past week.

For more information on the fixed-income market, visit our bond ETFs category.