Investors Are Falling for Fallen Angel Bonds | ETF Trends

With bond yields low and credit spreads tight, fixed income investors are facing myriad challenges this year. They’re finding some relief with fallen angel bonds.

The VanEck Vectors Fallen Angel High Yield Bond ETF (NASDAQ: ANGL) is the dominant exchange traded fund for accessing this corner of the high-yield corporate bond market — a status that’s being solidified this year as bond investors embrace niftier spins on high-yield bonds.

“In 2020, there were $164 billion of fallen angel bonds that came into ANGL’s index, according to VanEck, the largest year on record, as rating agencies considered the risks being faced by the Covid-19 pandemic,” said CFRA Research’s Todd Rosenbluth in a recent note. “While there were was only $10 billion of downgraded bonds entering ANGL in the first nine months of 2021, there was $13 billion worth of rising-star bonds that were upgraded back to investment-grade status due to improved fundamentals.”

As Rosenbluth notes, investors allocated nearly $1 billion to ANGL year-to-date, as of Oct. 11. That enthusiasm is understandable, as the VanEck ETF offers an array of benefits relative to traditional corporate bond ETFs. Fallen angels usually sport higher yields than investment-grade bonds, but they are higher quality and often offer superior return profiles compared to standard junk bonds.

Over the past three years, ANGL topped the largest junk bond ETF by 1,500 basis points while beating the biggest investment-grade corporate bond ETF by 540 basis points.

What’s interesting about ANGL’s out-performance of traditional junk bond ETFs is that the VanEck fund has higher credit quality. ANGL has a higher percentage of BB-rated bonds and lower allocations to issues rated B and CCC than are found in a standard junk bond ETF.

Another reason that ANGL is an attractive idea for long-term investors is that fallen angels typically regain investment-grade status more rapidly than bonds born as junk attain it. That feeds out-performance. All of those factors could be reasons why investors are flocking to ANGL this year.

“CFRA currently finds high-yield corporate bond ETFs to be more appealing to lower-yield fixed income ETFs that incur less credit risk. However, investors are refreshingly choosing among these offerings based on costs and exposure rather than choosing a fund based on its asset base,” concludes Rosenbluth.

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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.