Investors fall for the Fallen Angel Bonds

With low bond yields and tight credit spreads, bond investors face a myriad of challenges this year. They find some relief with the obligations of fallen angels.

The VanEck Vectors Fallen Angel High Yield Bond ETF (NASDAQ: ANGL) is the dominant exchange-traded fund for entering this corner of the high-yield corporate bond market – a status that is strengthening this year as bond investors embrace smarter spins on high-yield bonds.

“In 2020, there were $ 164 billion of lapsed angel bonds that entered ANGL’s index, according to VanEck, the largest year on record, as rating agencies considered the risks facing the pandemic. Covid-19 was at risk, ”CFRA Research’s Todd Rosenbluth said in a recent memo. “While there was only $ 10 billion of downgraded bonds entering ANGL in the first nine months of 2021, there was $ 13 billion of rising bonds that were reclassified to the status of investment quality due to improving fundamentals. “

As Rosenbluth notes, investors have allocated nearly $ 1 billion to ANGL since the start of the year, as of October 11. This enthusiasm is understandable, as the VanEck ETF offers a range of advantages over traditional corporate bond ETFs. Fallen angel investors typically have higher yields than higher quality bonds, but they are higher quality and often offer higher return profiles than standard junk bonds.

Over the past three years, ANGL has dominated the largest junk bond ETF by 1,500 basis points while beating the largest quality corporate bond ETF by 540 basis points.

The interesting thing about ANGL’s outperformance against traditional junk bond ETFs is that the VanEck fund has a higher credit quality. ANGL has a higher percentage of BB rated bonds and lower allocations to B and CCC rated issues than those found in a standard junk bond ETF.

Another reason ANGL is such an appealing idea to long-term investors is that fallen angel investors typically regain investment grade status faster than junk-born bonds reach it. It fuels outperformance. All of these factors could explain why investors are flocking to ANGL this year.

“The CFRA currently believes that high yield corporate bond ETFs are more attractive to low yield fixed income ETFs that incur less credit risk. However, investors refreshingly choose from these offerings based on cost and exposure rather than picking a fund based on its asset base, ”Rosenbluth concludes.

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