Fallen Angels: The Year In Review | Beyond Basic Beta Channel

By Nicolas Fonseca, CFA, ETF Product Analyst, VanEck

Fallen angels[1] outperformed the broad high yield[2] index by 0.72% in December and by 7.89% in 2020 (14.06% vs 6.17%).[3] December was a relatively quiet month in terms of downgrades, but strong from a return perspective (2.63% vs 1.91%)[4] as spreads continued to tighten and ended the year slightly lower than where they started.

2020 in Review

2020 was a roller-coaster year for the high yield market. In March, we saw massive spread widening followed by downgrades from severe economic disruptions due to Covid, and the U.S. Federal Reserve (Fed) stepping in to purchase individuals bonds and ETFs, which marked the beginning of a significant spread tightening cycle.

  • Fallen angel spreads ended the year below where they started, but experienced significant volatility, reaching 954bps at the widest levels in March
  • Top 2020 Sectors: Telecom an Energy contributed over 50% of the 7.89% of outperformance over broad high yield[5]
  • Top 2020 Issuers: New fallen angels contributed 84% of the outperformance over Broad High Yield[6]
    • The top five new fallen angel contributors were Occidental Petroleum (OXY), EQT Corporation (EQT), Kraft Heinz (KHC), Cenovus and Ford – following what we wrote back in August
  • Outperformance for the year was primarily explained by security selection, with positive contributions from within each sector
  • Allocation effect was also significantly positive, with the overweight to Energy being the biggest contributor[7]
  • Interest rate movements also contributed positively to outperformance. Fallen angels have a longer duration compared to the broader high yield market, on average.[8] Historically, interest rate movements have not been a primary driver of long-term outperformance relative to the broader market.

Fallen Angels May Continue to Outperform in 2021

We believe fallen angels can continue to provide outperformance potential versus the broad high yield market, as they have through various credit cycles. Long-term historical returns have been explained by three primary drivers, which can have differing impacts depending on the market environment: a fallen angel technical effect, contrarian sector exposures and higher average credit quality. While 2020 was dominated by the fallen angel technical effect, we believe all three of these drivers have the potential to meaningfully contribute to returns this year. The chart below details five periods where the broad high yield spreads were below the long-term average and that fallen angels have consistently outperformed the broad market in these periods. In the current period, starting late July, fallen angels are already ahead by over 3%.

Fallen Angels Have Outperformed in Tight Spread Environments

Fallen Angels Have Outperformed in Tight Spread Environments

Source: ICE Data, VanEck.


Cumulative Total Return
Beg Date End Date Fallen Angel Broad HY
12/31/2003 11/15/2007 30.10 30.08
12/22/2010 7/28/2011 8.04 6.87
12/7/2012 8/5/2015 21.35 12.73
8/11/2016 3/5/2020 30.47 23.71
7/21/2020 12/31/2020 11.19 7.77

Source: ICE Data, VanEck.

2020 Overall Statistics

For the first time, the average yield to worst (YTW) of the fallen angel index dipped below 4%. The increase in duration, market value and number of issues is explained by the large number of downgrades that occurred earlier in 2020. Fallen angels are those bonds having been issued with investment-grade status and then downgraded. As a result they typically have longer dated maturity and longer duration, thus duration significantly increased from 5.92 to 6.82.

Fallen Angel Broad HY
 12/31/2019  12/31/2020  12/31/2019  12/31/2020
Yield to Worst 5.22 3.80 5.41 4.24
Mod. Dur to Worst 5.92 6.82 3.03 3.37
Full Market Value ($mn) 110,451 252,730 1,242,189 1,543,269
No. of Issues 193 328 1,775 2,030

Source: ICE Data, VanEck.

A New Fallen Angel

A new issuer entered the fallen angel index at the end of December: Seagate HDD Cayman – the only Tech related fallen angel in 2020. The total amount of new fallen angels in 2020 was about $165B, with the vast majority coming in April month-end after the first wave of lockdowns in the U.S.

Month-end Addition Name Rating Sector % Mkt Value Price Face Value
December Seagate HDD Cayman BB Technology & Electronics 1.36 110.25 3,084

Source: ICE Data, VanEck.

No Rising Stars in December

Performance by Sector

Autos joined the fallen angel index in 2020 when Ford was downgraded. Energy and Utility issuers were the other two industries that saw their weights increase. The average spread on Energy sector bonds, which account for 29% of the fallen angel index, tightened significantly from the elevated levels in March and April, and is now lower than the beginning of 2020. Bonds of Telecom and Energy issuers contributed almost 50%[9] to the Index outperformance vs broad high yield to the YTD figure.

Wgt (%) OAS Monthly TR %
 12/31/2019  12/31/2020  12/31/2019  12/31/2020  12/31/2020
Automotive 10.00 274 1.79
Banking 11.01 3.64 208 215 1.23
Basic Industry 16.83 6.94 210 236 1.61
Capital Goods 2.09 3.08 282 305 2.20
Consumer Goods 7.27 12.38 192 221 1.49
Energy 17.35 28.83 576 393 4.46
Financial Services 0.48 0.92 528 263 1.58
Healthcare 1.46 0.48 408 369 1.00
Insurance 2.00 0.42 336 673 0.47
Leisure 2.03 4.85 204 372 1.52
Real Estate 2.96 3.77 628 511 3.19
Retail 5.99 3.55 461 427 3.23
Services 1.59 1.01 133 232 1.11
Technology & Electronics 10.09 4.24 200 224 1.70
Telecommunications 16.90 7.48 378 272 2.58
Transportation 0.63 1.96 513 336 3.77
Utility 1.30 6.45 311 207 1.01
Total 100 100 337 313 2.63

Source: ICE Data, VanEck.

Performance by Rating

Throughout 2020, the fallen angel index increased its exposure to higher quality bonds from 77% in the beginning of January to 95% at the end of the year. The increase in higher quality bonds was due to the record number of issuers downgraded as the economy shut down in the early part of the year. As expected, all of the issuers joined the index with BB credit ratings. For the month of December and despite the inclusion of one new fallen angel, there were no significant changes to the overall rating weight. Notably, CCC and lower-rated bonds performed best in the last few months of the year after general optimism with the vaccine announcements, but fallen angels continued to outperform the broader high yield market.

Wgt (%) OAS Monthly TR %
12/31/2019 12/31/2020 12/31/2019 12/31/2020 12/31/2020
BB 76.67 94.56 241 296 2.58
B 16.20 3.96 433 470 2.26
CCC 7.14 1.14 1150 639 5.06
CC 0.15 2254 25.18
C 0.19 2321 4.06
Total 100 100 337 313 2.63

Source: ICE Data, VanEck.

Originally published by VanEck, 1/13/21


Fallen angels refers to the ICE US Fallen Angel High Yield 10% Constrained Index (H0CF)

Broad high yield refers to the BofA US High Yield Index (H0A0), also referred as the broad benchmark.

ICE Data as of 12/31/2020

ICE Data as of 12/31/2020

Factset as of 12/31/2020

Factset as of 12/31/2020

Factset as of 12/31/2020

When interest rates fell, the value of the value of bonds with a longer duration rises more than a bond with a shorter duration.

Factset as of 12/31/2020

A fallen angel bond is a bond that was initially given an investment-grade rating but has since been reduced to junk bond status.

High yield bonds may be subject to greater risk of loss of income and principal and are likely to be more sensitive to adverse economic changes than higher rated securities.

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ICE BofAML US High Yield Index (H0A0, “Broad HY Index”), formerly known as BofA Merrill Lynch US High Yield Index prior to 10/23/2017, is comprised of below-investment grade corporate bonds (based on an average of various rating agencies) denominated in U.S. dollars.

ICE US Fallen Angel High Yield 10% Constrained Index (H0CF, Index) is a subset of the ICE BofA US High Yield Index and includes securities that were rated investment grade at time of issuance.

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