Fallen Angel Yields Could Signal Opportunity | ETF Trends

Like other fixed income assets, fallen angel bonds have proven vulnerable to the recent spike in Treasury yields, but those elevated yields could signal an opportunity for patient, risk-tolerant fixed income investors.

Last month’s spike in 10-year Treasury yields weighed on the index tracked by the VanEck Fallen Angel High Yield Bond ETF (ANGL) – the original exchange traded fund dedicated to this corner of the bond market. As of October 16, the $2.45 billion ANGL sported a 30-day SEC yield of 7.77%. Yields in the neighborhood of 8% are not frequent in the fallen angel realm.

Despite obvious headwinds from rising Treasury yields, ANGL is higher by nearly 3% year-to-date, impressive when considering the state of affairs in the bond market. Add to that, the VanEck ETF is soundly outpacing the largest investment-grade corporate bond ETF while displaying less annualized volatility than that fund.

Budding Case for ANGL

For bond investors who are not familiar with fallen angels, an important point should be highlighted. Over the long-term, an ETF such as ANGL has the potential to outperform a standard junk bond fund because fallen angel bonds typically have a better chance of returning to investment-grade status, making them “rising stars,” than do bonds born in non-investment-grade territory.

In a scenario that could bode well for ANGL heading into 2024, the universe of fallen angels is experiencing population decline this year because some of those bonds are becoming rising stars.

This year, the fallen angel index has decreased by approximately 36% due to rising stars, compared to an increase of 14% due to new fallen angels. For context, in 2022 there were 18% of rising stars vs 8% of new fallen angels,” noted Nicolas Fonseca, VanEck product manager.

Another fact that could support near- to medium-term gains for ANGL is high oil prices. The ETF allocates more than 14% of its weight to fallen angels from energy issuers, which have been a primary source of the increased population of rising stars this year.

Should the fallen angel carry situation improve, ANGL could build on recent sturdiness and derive support from its advantageous sector exposures.

“Carry has also been a negative contributor to fallen angel underperformance, as fallen angels have a lower average yield versus the broad high yield market due to their significantly higher credit quality. However, sector exposures and selection within sectors have both been positive contributors to relative performance, somewhat offsetting the impact of higher rates,” concluded Fonseca.

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