Not Time to Fret About Fallen Angels Just Yet | ETF Trends

Amid a slew of corporate credit downgrades that saw some previously investment-grade issues head to junk territory, the VanEck Vectors Fallen Angel High Yield Bond ETF (NASDAQ: ANGL) dropped 1.73% in February, but that should not imply that investors should abandon fallen angels just yet.

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.

“In February, we saw the credit ratings downgrades of Macy’s, EQT Corporation, EQM Midstream Partners and Kraft Heinz, one of the largest fallen angels ever,” said VanEck in a note out Monday. “While we may be starting to see a rise in downgrades to fallen angel status, we believe this is still on a one-off basis rather than a sign of a systemic decline in the credit markets.”

Assessing ANGL

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.

The $1.9 billion ANGL has a 30-day SEC yield of 4.69%, an alluring trait at a time when Treasury yields continue plummeting. Fortunately, February may prove to not be a precursor to massive additions to the fallen angel landscape.

“With global central banks now providing ever more liquidity and our firm’s positive outlook on growth, we do not believe a massive wave of downgrades will occur in the absence of a geopolitical shock that resulted in an abrupt slowdown or recession,” said VanEck. “Nevertheless, given the sheer size of the BBB and BBB- rated universe—over 50% of all investment-grade bonds—and events from the first two months of 2020, we do expect to see an increase in fallen angel volume driven by idiosyncratic downgrades, even if the systemic risk of a “junk tsunami” is not imminent.”

Although the environment may appear trying at the moment, there remains a compelling case for fallen angels and ANGL.

“An appealing aspect of fallen angel investing is the exposure to the secular recoveries that often occur after fundamentals have bottomed out, but investors may be less comfortable with issuer-specific credit stories,” according to VanEck. “We, therefore, believe that reasonably capping exposure to a single issuer is a prudent approach that limits the risk of further deterioration while maintaining the benefits of a more unconstrained approach.”

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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.