High-yield corporate debt, also known as junk bonds, represent a significant chunk of the broader fixed income market. That heft is reflected in the population of ETFs offering exposure to this asset class.
On that note, investors that are new to the junk bond space should commit to a small amount of homework. They will realize that there are important differences among junk bond ETFs. The VanEck Fallen Angel High Yield Bond ETF (ANGL) is a case study in that scenario.
The reasoning is simple. Fallen angels – the asset class on which ANGL focuses – aren’t standard junk bonds. Rather, fallen angels are corporate bonds born in investment-grade territory that are latter downgraded to junk. That’s an important differentiating fact between ANGL holdings and standard high-yield corporate debt.
How ANGL Sets Itself Apart
Alone, the aforementioned difference between ANGL components and traditional junk bonds is likely to catch the eye. Of course, those market participants are likely to and should wonder how that characteristic affects performance.
“The price return of fallen angels has been a key differentiator versus broad HY from a total return perspective, driven by the systematic purchases of oversold/undervalued bonds that have been downgraded to high yield and have tended to recover in the months after being downgraded,” noted VanEck product manager Nicolas Fonseca.
Superior price action among fallen angels isn’t linear; it’s not guaranteed to repeat every year. For example, ANGL is slightly trailing one of the largest junk bond ETFs on a year-to-date basis. However, over the past three years — a period including one of the most intense stretches of Federal Reserve rate tightening in recent memory — the VanEck ETF beat both of the two largest high-yield bond ETFs by margins of better than 2-to-1. ANGL achieved that impressive feat with annualized volatility that was on par with its rivals, confirming better risk-adjusted returns.
ANGL could also be pertinent to fixed income over the near- to medium-term because, while fallen angel supply has been tight over the past several years, signs are emerging that could soon change. Historical data indicate that fallen angels often experienced upticks in performance as new bonds enter the market.
“While it’s impossible to predict the exact timing, given these broader dynamics, it’s difficult to envision a scenario where downgrades do not increase. Historically, fallen angel price returns have been at their strongest, and their outperformance against the broader high-yield market has been most pronounced when a significant number of downgraded bonds, typically deeply discounted, enter the market,” concluded Fonseca.
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