Assessing the Fallen Angel Bond Landscape | ETF Trends

Despite fears of elevated default rates, high interest rates, and the possibility of a recession, high yield corporate debt is delivering for fixed income investors this year.

That includes both fallen angels and traditional junk bonds. Actually, the former are outpacing the latter, as the VanEck Fallen Angel High Yield Bond ETF (NASDAQ: ANGL) is beating the widely followed Markit iBoxx USD Liquid High Yield Index by 40 basis points year-to-date. The VanEck exchange traded fund is also sporting annualized volatility that’s below both the Markit iBoxx USD Liquid High Yield Index and the investment-grade Markit iBoxx USD Liquid Investment Grade Index.

An interesting element of the fallen angel equation in 2023 is that the number of such bonds that could gain that label is increasing, meaning the number of credit downgrades is increasing, while the number of rising stars — fallen angels regaining investment-grade ratings — is declining. At the end of the first quarter, nine companies were in danger of seeing bonds become fallen angels while just three flirted with rising star status.

“Of these 12 companies, 11 moved because of changes (positive or negative) in their credit fundamentals, and one was the result of M&A. Ten companies exited the zone in Q1 because of changes in their credit fundamentals: six were upgraded to investment grade, three had outlooks changed, and one was downgraded to speculative grade,” according to Moody’s Investors Service.

ANGL follows the ICE US Fallen Angel High Yield 10% Constrained Index and is home to 207 bonds. Owing to the fact that fallen angels are corporate bonds born with investment-grade ratings, ANGL’s credit profile is often higher-quality than standard junk bond ETFs. That’s affirmed by an 84% allocation to BB-rated debt and a mere 3% to highly speculative CCC-rated fare.

ANGL’s superior credit profile is pertinent for another reason: Today, the number of actual rising stars is in excess of fallen angels, and as bonds become rising stars, they appreciate in price, bringing a potential boon for ANGL investors along the way.

“Two companies were downgraded to speculative grade, while seven were upgraded to investment grade in Q1. This was the third-lowest number of crossovers since Q3 2019. Two companies skipped the zone entirely with one going straight to speculative grade from investment grade, and the other moving to investment grade without crossing through the zone,” added Moody’s.

Speaking of rising stars, on a regional level, North America has the world’s most rising stars, enhancing the allure of ANGL’s combined weight of nearly 86% to the U.S. and Canada.

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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.