Fallen Angels' Consistency Is Noteworthy | ETF Trends

One of investors’ primary objectives when investing in bonds is consistency. To that end, it might surprise some fixed income investors that fallen angel bonds — which form a unique segment of the high-yield debt market — are remarkably consistent.

The VanEck Vectors Fallen Angel High Yield Bond ETF (NASDAQ: ANGL) is the premier exchange traded fund for investors seeking broad-based fallen angels exposure, and the $4.7 billion ETF provides exposure to the consistency that this asset class has a reputation for.

“The fallen angels index outperformed the broad high yield index by 0.40% in December and by 2.36% for 2021 (7.72% vs 5.36%), making it the 14th year that fallen angels have outperformed broad high yield over the last 18 calendar years. The majority of the outperformance in 2021 came from the energy sector, where fallen angels are overweight the broad high yield index by more than 2x,” writes Nicolas Fonseca, VanEck associate portfolio manager.

ANGL follows the ICE US Fallen Angel High Yield 10% Constrained Index. A primary reason why ANGL and its benchmark established such a lengthy run of out-performance over traditional junk bond benchmarks is that fallen angels are born as investment-grade bonds.

Historically, bonds that debut as investment-grade and are later downgraded to high-yield are more frequently upgraded to investment-grade territory than debt born directly into the junk camp. With those upgrades comes price appreciation. Some rising stars hail from the energy sector, ANGL’s largest sector exposure at 27.1%.

“The 2020 fallen angels, but most importantly, the future rising stars haven been driving performance. Oxy, Kraft, Ford, Western Midstream and APA were the top 5 issuers that contributed to relative outperformance vs broad high yield,” adds Fonseca.

Of course, because fallen angels are bonds, investors are likely pondering the fate of this asset class against the backdrop of rising interest rates, particularly because fallen angels are longer-duration fare. However, as VanEck’s Fonseca notes, fallen angels can outperform even when the Federal Reserve turns hawkish.

From the “middle of 2004 to middle of 2006: Fed Funds were raised from ~1% to ~5.25% and the fallen angels outperformed by 1.59% (18.65% vs 17.06%),” notes Fonseca. “From October 2015 to January 2019: Fed Funds were raised from ~0% to ~2.5% and the fallen angels outperformed by 8.93% (31.87% vs 22.94%).”

Those periods represent the last two times the Federal Reserve dramatically increased its benchmark lending rates.

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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.