This High-Yield ETF Is a Fine Compliment to Income-Generating Portfolios

The VanEck Vectors Fallen Angel High Yield Bond ETF (NASDAQ: ANGL) isn’t an ordinary high-yield corporate ETF and that’s more than alright.

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.

As has been widely noted, the fallen angel universe is expanding in dramatic fashion this year, but that’s a benefit, not a problem for ANGL.

“The fallen angel market has welcomed several big names this year, including Kraft, Ford and Occidental Petroleum,” said VanEck in a recent note. “After the most recent entrants at the end of May, the year to date total fallen angel market value reached $199B. Historically, strong returns and outperformance vs. the broad high yield market have followed years where there has been a high volume of fallen angels.”

Lots to Like With ANGL

The Federal Reserve is armed with trillions of dollars and ready to go on a bond shopping spree, which includes purchases in high yield–a move that should also have a ripple effect into the debt of companies that have fallen out of investment-grade favor or “fallen angels.”

Another benefit offered by ANGL, one with longer-ranging implications, is the superior credit quality offered by fallen angels relative to other junk bonds.

“A majority of the bonds that become fallen angels end up in the BB bucket, which means less credit risk for investors compared to the broad high yield market. After the fallen angel index welcomed a significant number of new issuers in April-month-end, it had 92% concentration to BB,” according to VanEck. “In comparison, only 56% of the broad U.S. high yield market were rated BB. In May-month-end, the two new fallen angels were both rated BB, which kept the index’s BB exposure steady at 92% vs 55% of the broad U.S. high yield market.”

Since these fallen angels were formerly on the cusp of investment-grade status, the group of junk bonds typically has a higher average credit quality than many other speculative-grade debt-related funds. The higher average quality also helped absorb some of the market volatility we experienced last year.

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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.