Fallen angels are delivering decent performances on a year-to-date basis. They are outperforming investment-grade corporate bonds while keeping pace with traditional high-yield fare.
The VanEck Fallen Angel High Yield Bond ETF (ANGL) is the dominant ETF tracking corporate bonds born with investment-grade ratings that are later downgraded to junk status. It provides efficient exposure to a potential-rich — though often overlooked — corner of the corporate bond market. Advisors and investors considering ANGL should examine why the $3.07 billion ETF is holding up well this year.
One of those factors is increased exposure to newly downgraded bonds from issuers in the retail industry. The ICE US Fallen Angel High Yield 10% Constrained Index – ANGL’s underlying benchmark – had an allocation of just 6% to bonds issued by retailers in December 2022. But as of April 30, ANGL had a 20.77% weight to the consumer discretionary sector, making that the ETF’s largest sector exposure.
Retailers Could Propel ANGL
ANGL is home to 131 holdings, none of which exceed a weight of 3.54%. That indicates single-issue risk is relatively benign in the fund. That diversification is apparent when it comes to the ETF’s allocations to debt issued by retailers.
“Overall Retail exposure is currently comprised of 11 different issuers within four industries: Specialty Retail (approximately 4.3% weight), Department Stores (approximately 6.9%), Food & Drug Retailers (approximately 7.3%) and Restaurants (approximately 1.1%),” noted Nicolas Fonseca, VanEck product manager. “Retail has been the best performing sector over the past 12 months, with a 16.51% return, and the second highest performing sector over the past six months, behind Financial Services, as it posted 15.69% contributing positively to the fallen angel index performance. Most of the performance has come from approximately 300bps of spread tightening over the last 12 months.”
As Fonseca pointed out, fallen angels — courtesy of retail issuers — typically sport longer durations than other bonds in this camp. That’s an indication that if 10-year Treasury yields remain steady or even trend lower in modest fashion, ANGL could benefit. The ETF has an effective duration of 5.18 years, according to issuer data.
Another advantage offered by ANGL is that fallen angels tend to sport higher credit quality than traditional junk bonds. For example, the ETF features a weight of almost 60% to debt rated BB. That served as a catalyst for the fund in April.
“There were no major changes with the rating exposure for fallen angels during the month. Higher quality outperformed lower quality, as only BB-rated bonds saw their spreads tighten (almost unchanged) while lower quality widened, but all posted negative price returns,” concluded Fonseca.
For more news, information, and analysis, visit the Beyond Basic Beta Channel.
