Low yields across the fixed income landscape are prompting investors to revisit high-yield corporate bond ETFs, but although the Federal Reserve appears poised to lower interest rates again this month, investors should still consider higher-quality junk fare.
Fallen angel bonds, as represented by the VanEck Fallen Angel High Yield Bond ETF (NYSEArca: ANGL), can help investors accomplish that objective. In fact, ANGL is outperforming traditional high-yield bond ETFs again this year, something the VanEck fund has made a habit of since comping to market seven and a half years ago.
Since the end of 2003 through August 2019, fallen angels have on average historically outperformed the broad high yield bond market and active high yield bond fund managers. Fallen angels outperformed the broad high yield bond market 11 of the last 15 calendar years, including 7 of 9 calendar years when interest rates rose more than 1%
“Fallen angel bonds are part of the overall high yield universe but unique in that they were originally issued with investment-grade ratings and later downgraded to non-investment grade, or high yield,” said VanEck in a recent note. “This results in differentiating characteristics versus the broader high yield bond market—such as a higher average credit quality—and the crossover from investment grade to high yield markets is where the value proposition of fallen angels originates.”
Fallen angel bonds offer a potential value play as the debt securities typically experience a steep sell-off from institutional forced selling prior to being added to the fallen angels’ group. Looking ahead sector themes can help support potential price appreciation. Additionally, the groups’ higher average credit quality can help diminish market volatility.
For long-term investors, ANGL has other benefits that aren’t prominent in other junk bond funds.
“Te market tends to anticipate rating actions, so bonds are typically sold and prices driven down prior to the downgrade. Historically, prices have tended to recover fully during the six months, on average, following the downgrade,” according to VanEck. “This forced selling phenomenon and the higher quality tilt have driven long-term outperformance of fallen angels versus the broad high yield market. In addition, fallen angels provide differentiated sector exposure versus the broad market.”
Importantly, ANGL allocates a scant percentage of its weight to bonds in the CCC or lower category, a trait that can mitigate some of the risk associated with high-yield corporate debt.
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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.