High-yield corporate bond exchange traded funds are experiencing a resurgence this year, but, arguably, none are as hot as the VanEck Fallen Angel High Yield Bond ETF (ANGL) .
In 2015, high-yield corporate bond exchange traded funds were dragged lower by sagging oil prices and a spate of issuer defaults in the energy sector. This year, oil prices are rising, providing some relief to junk bond ETFs, but one of these funds is truly standing out. This year, ANGL is benefiting because its energy exposure significantly increased, and at just the right time, as many former investment-grade issues from the energy patch became fallen angels.
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ANGL tracks so-called fallen angel speculative-grade rated debt, or debt securities that were initially issued with an investment-grade rating but were later downgraded to junk territory. Fallen angel issuers tend to be larger and more established than many other junk bond issuers.
Furthermore, 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.
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“Fallen angel bonds outperform for a number of reasons. First, since the bonds were once investment grade, issuers tend to be larger, more established companies. Secondly, fallen angel debt generally exhibit higher average credit rating than the broader high yield market, which could give an additional element of stability in times of stress. Third, indiscriminate selling pressure on debt that is downgraded to junk status may cause the bonds to be oversold, which could present a good buying opportunity. Fourth, since many bonds are BB-rated, if they do regain investment grade status, this could provide a catalyst for outperformance as bond managers buy back in,” according to a Seeking Alpha analysis of ANGL.
Earlier this year on the webcast Fine Tune Your High Yield Strategy with ETF Trends, said that 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.