While there are some concerns about traditional high-yield corporate bonds and the related ETFs, the VanEck Fallen Angel High Yield Bond ETF (NYSEArca: ANGL) remains a solid choice for investors looking to tap a unique corner of the junk bond market.
ANGL tracks so-called fallen angel speculative-grade rated debt, or debt securities that were initially issued with an investment-grade rating but were later downgraded to junk territory. 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 greater concentration of higher quality or BB-rated speculative-grade bonds.
“Fallen angel high yield bonds outperformed the broad high yield bond market over the third quarter and year to date,” said VanEck in a recent note. “Fallen angel returns were +3.7% for the quarter, bringing year-to-date performance to +9.4% through September 30, outperforming the broad high yield bond market by +1.7% and +2.4%, respectively. Continued optimism over potential tax reform and oil price stabilization over the third quarter helped the high yield market in general. Fallen angel positions in, and higher allocations to, the energy, basic industry, and telecom sectors were some of the main drivers of outperformance versus the broad high yield bond market.”
Related: A More Diversified ETF Approach to the High-Yield, Junk Bond Market
ANGL holds 234 bonds, two-thirds of which are issued by U.S. companies. The energy and materials sectors combine for 48% of the ETF’s weight. Fallen angel bonds from telecommunications and financial services issuers combine for another 30%.
“Investors should consider fallen angels’ overweight to both the energy and basic industry sectors, factoring in any views they may have on commodities’ prices, as these have meaningfully influenced returns in the two sectors,” according to VanEck. “Historically, such differences in sector allocations versus the broad high yield bond market have, on average, helped offset some of the negative impact from rising interest rates, as rate increases often coincide with market recoveries.”
The $1.2 billion ANGL has a 30-day SEC yield of almost 4.8% and an average portfolio maturity of 10.9 years. Nearly 95% of the ETF’s holdings carry BB or B ratings. ANGL has an effective duration of 6.65 years.
For more information on corporate debt, visit our corporate bonds category.