There’s now estimated $17 trillion in negative-yielding debt floating around throughout the world, underscoring the point that some fixed income strategies aren’t delivering the income investors are hoping.
That scenario can increase the allure of junk bond ETFs, but investors should focus on a higher-quality fare in this segment and can do that with the VanEck Vector Fallen Angel High Yield Bond ETF (NYSEArca: 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 “Fallen Angel Index”). The fund normally invests at least 80% of its total assets in securities that comprise the fund’s benchmark 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. The $1.1 billion ANGL has a 30-day SEC yield of 5.33%.
ANGL has an effective duration of 5.71 years, putting it in the intermediate-term territory, a space that can be attractive as the Federal Reserve lowers interest rates.
ANGL Angles Have Fallen
“As a general rule of thumb, for every 1% increase/decrease in interest rates, there should be a 1% decrease/increase in price (remember bond prices and interest rates are inversely related) for every one year in duration,” said VanEck in a recent note. “In a falling interest rate environment, ANGL’s higher duration (6.215 based on aggregate cash flow (ACF) methodology) should lead it to outperform relative to its broad high-yield peers. Fallen angel bonds generally have an average higher duration because of their previous status as an investment-grade issuer; because of their fundamentals, investment-grade issuers can generally obtain longer-term funding.”
Fallen angel bonds offer a potential value play as the debt securities typically experience a steep sell-off from institutional forced selling prior to being added to the fallen angels’ group. Looking ahead sector themes can help support potential price appreciation. Additionally, the groups’ higher average credit quality can help diminish market volatility.
Importantly, ANGL allocates just above 6% of its weight to bonds in the CCC or lower category, a trait that can mitigate some of the risk associated with high-yield corporate debt.
“From the universe of high yield bonds, the higher quality names (i.e. BB) have outperformed the lower quality names (i.e. B, CCC and lower). ANGL’s tilt towards BB exposure (~75%) has helped outperform its peers in the broad high yield space since mid-May of this year,” according to VanEck.
For more news and strategies in fixed income, visit ETFtrends.com.