The VanEck Vectors Fallen Angel High Yield Bond ETF (NASDAQ: ANGL) is in the spotlight this year as the Federal Reserve acts to steady high-yield corporate bond markets and as investors rush to generate more income.
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.
With so many previously investment-grade bonds being downgrade, 2020 is already a record year in terms of fallen angel “births,” but that’s not dragging on ANGL’s performance.
“Fallen angel bonds, as represented by the ICE US Fallen Angel High Yield 10% Constrained Index (‘Fallen Angel Index’), has outperformed the broad high yield market, as represented by the ICE BofA High Yield Index (‘High Yield Index’), returning -1.2% vs. -4.8% year-to-date as of 6/30/2020,” said VanEck portfolio manager William Sokol in a recent note. “This year’s outperformance is being driven by the same factors that have been key to the fallen angel bond strategy’s consistent long-term outperformance.”
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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 witness earlier this year.
Investors should note that embracing fallen angels requires a bit of a contrarian spirit.
“Second, fallen angel investing is a contrarian approach. The portfolio tends to be overweight sectors where values are depressed and fundamentals have bottomed out, providing the potential to benefit from a recovery,” notes Sokol. “We’re seeing that right now with an overweight to the energy sector, which has actually been a positive contributor to the Fallen Angel Index’s outperformance this year (as of 6/30/2020) despite being one of the worst-performing sectors in the broad High Yield Index.”
Adding to the allure of ANGL is that fallen angels are entering the fund’s index at lower prices than in years past.
“The average discount of fallen angels as they’ve entered the Fallen Angel Index this year through June is nearly 15%, more than twice the 10-year average prior to 2020,” according to Sokol. “This provides additional potential for investors to participate in a price recovery. Overall, we see that the market is continuing to differentiate between credits and that the consistent and repeatable fallen angel technical effect remains intact.”
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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.
