Fed Likes This Fallen Angel ETF, but There's More to Its Positive Story

Count the VanEck Vectors Fallen Angel High Yield Bond ETF (NASDAQ: ANGL) among the variety of corporate bond ETFs the Federal Reserve is buying. The good news for investors is that there’s much more to the ANGL story even without the Fed embracing the fund.

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.

With many fixed-income investors still concerned about risk and volatility, ANGL makes for an ideal income solution in the current market environment.

“Fallen angels are different from ordinary junk bonds. They tend to court less credit risk and more interest-rate risk,” said Morningstar analyst Neal Kosciulek in a recent note. “Compared with a broad index of high-yield bonds, an index of fallen angels will have greater concentration risk. Also, the size and composition of the fallen angel market will evolve more rapidly. This is because cyclical and structural changes in the economy that precipitate credit ratings downgrades will dictate its makeup, not new issuance activity–as is the case with mainline high-yield indexes.”

ANGL Stands Out

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.

Amid a spate of recent downgrades, ANGL’s benchmark “jumped 70% between January 2020 and May 2020, following a raft of credit ratings downgrades spurred by the fallout of the coronavirus crisis,” according to Morningstar.

With interest rates at historic lows, companies are taking advantage of the opportunity to refinance current debt for lower rates via bond offerings, especially those that are cash-strapped during the COVID-19 crisis. However, this could spur a glut in high yield debt issues that could flood the bond markets, which isn’t helped by an increasing number of downgrades.

Today’s low interest rates are important when considering ANGL because fallen angels are historically sensitive to higher rates.

“Given their origins, fallen angels tend to carry additional interest-rate risk relative to a traditional high-yield bond. Accordingly, the fallen angel index has traditionally courted more interest-rate risk relative to the broader high-yield sector,” notes Morningstar.

For more on tactical strategies, please visit our Tactical Investing Channel.

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.