Investor interest in bond ETFs reached fever pitch during the summer as volatility in equities spurred a demand for safe haven assets. However, low rates have high yield bond seekers looking for ways to earn a higher-than-average return on debt, which they may find in the VanEck Vectors Fallen Angel High Yield Bond ETF (BATS: ANGL).
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.
ANGL essentially 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.
“The premise behind fallen angels is simple,” wrote Todd Shriber in a Nasdaq article. “They’re corporate bonds that were born with investment-grade ratings and were later downgraded to junk status. For those that are in school or with kids in school, think of fallen angels as former honor roll students that lose their way. Good news: as is the case with students, fallen angel bonds can regain their lost luster and deliver impressive results.”
How has the fund been doing thus far? ANGL has been yielding over 15% YTD according to Morningstar performance numbers.
With the extended bull run raging on, it’s been a boon for high yield fixed income investors where a risk-on environment has been fueling gains within the riskier bond classes. However, with rate cuts by the Federal Reserve and fears of a global economic slowdown looming, the high yield party just may be starting to wind down.
Even domestically, the market may start losing steam despite a generally strong labor market with a low unemployment rate. With the high yield market getting more risky, it’s necessary for investors to shed some of that risk and get more strategic with their capital allocation.
This could mean looking to options like investment-grade debt for higher yielding income sources. After investors got washed through the May volatility cycle thanks to trade wars, that may have tamped down their risk-on sentiment and this is where a potential buying opportunity exists for investment-grade debt—as a result, high yield has underperformed lately as investors flocked to the safer confines of quality oriented assets like investment-grade debt issues.
Investment-grade corporate bond-focused fixed-income ETF options include the iShares Intermediate Credit Bond ETF (NASDAQ: CIU), iShares iBoxx $ Investment Grade Corp Bd ETF (NYSEArca: LQD) and Vanguard Interm-Term Corp Bd ETF (NASDAQ: VCIT).
For more trends in fixed income, visit the Fixed Income Channel.