Can Fallen Angel ETFs Strike the Right Mix of Risk and Reward?

The VanEck Vectors Fallen Angel High Yield Bond ETF (NASDAQ: ANGL) is a surprisingly credible option for investors looking to elevate retirement income streams.

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 fact, ANGL is all the more useful at a time when 10-year Treasury yields are rising. Historical data confirm as much.

“While rising rates are generally negative for rate sensitive asset classes like fallen angel high yield bonds, the reason behind the latest rate moves may provide support for fallen angels,” writes VanEck analyst Nicholas Fonseca. “Historically, the fallen angels index has provided positive returns and outperformance vs the broad high yield index in most rising rate periods. Higher rates reflect expectations for stronger growth, which is generally positive for high yield bonds. The fallen angels index, in particular, may benefit due to a higher weight towards economically sensitive sectors which may have stronger participation in the ongoing economic recovery.”

ANGL 1 Year Total Return

Get the Right Angles on ‘ANGL’

Fallen angels, high yield bonds originally issued as investment grade corporate bonds, have had historically higher average credit quality than the broad high yield bond universe. ANGL is off to a strong start in 2021.

Additionally, it’s hard to ignore ANGL’s rising rates utility.

“Although the longer duration of fallen angels has played a detracting role amid rising interest rates, on average the fallen angels index outperformed the broad high yield market index overall (returning 8.97% vs. 7.69%, respectively) over the 15 periods where the 10-Year rate rose,” adds Fonseca. “Over the most recent period, as 10-year yields rose from 0.52% to 1.75%, fallen angels returned 8.55% and broad high yield returned 7.14%.”

Fallen angels have historically offered a better risk/reward trade off than found with the broad high yield bond market. And, as usual, ANGL offers higher quality than standard junk bond ETFs.

“Fallen angel bonds continue to provide a heavy tilt towards higher quality high yield bonds. At quarter-end, 94% of fallen angels were rated BB, the highest rating category within high yield. Lower rated bonds, however, performed best in Q1 as investors prepared for the economy to get back on track. These bonds usually pay higher coupons, which offer some protection against rising yields. They are also favorable when expectations for growth is high as defaults tend to be low,” according to Fonseca.

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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.