Dominant Fallen Angel ETF Raises Credit Even as Downgrades Increase

A raft of downgrades of corporate bonds to junk status from investment-grade territory is setting the stage for the VanEck Vectors Fallen Angel High Yield Bond ETF (NASDAQ: ANGL) to enhance its credit quality.

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. Due to the aforementioned spate of downgrades, the fallen angel universe is increasing in exponential fashion.

True to the firm’s prediction that the category of eligible issuances would grow significantly following the economic turmoil driven by COVID-19 the past few months, VanEck noted that the fallen angel universe increased by 50% during April 2020, with $72 billion of new fallen angels entering the category,” said ANGL’s issuer.

Since these fallen angels were formerly on the cusp of investment-grade status, the group of junk bonds typically has a higher average credit quality than many other speculative-grade debt-related funds. The higher average quality also helped absorb some of the market volatility we experienced last year.

ANGL Getting Bigger, Quality Increasing

“Fallen angels, which are high yield bonds that have been downgraded from investment-grade to junk status, historically have higher credit quality and may be better poised for a rebound than other corners of the junk bond marketplace,” according to VanEck. “Following this most recent rebalancing of ANGL and its underlying index, more than 90% of the fund’s holdings are now rated BB, the highest rating within high yield.”

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 newest additions to the fund’s portfolio are skewed towards the energy and automotive sectors, as both of those areas of the economy have been hit with a wave of downgrades in recent weeks,” notes VanEck. “Additionally, many newer fallen angels have joined the category at lower price levels compared with others in the category, providing a greater potential to benefit from price recovery.”

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