Amid Bond Market Calamity, Don’t Ignore Fallen Angels


Oith two interest rate hikes planned by the Federal Reserve and more to come, to say this is a tumultuous time in the fixed income market is perhaps an understatement.

High-yielding corporate bonds are angering bond sellers and casting a pall over previously attractive exchange-traded funds, including VanEck Vectors Fallen Angel High Yield Bond ETF (NASDAQ: ANGL).

ANGL, which tracks the ICE US Fallen Angel High Yield 10% Constrained Index, sports a 30-day SEC yield of 5.83% – definitely high-yield territory. More importantly, its status as the largest fund dedicated to fallen angels is relevant because fallen angels are not typical junk bonds, many of which are faltering this year amid Fed tightening.

“Fallen Angels have, on average, a higher credit quality than other junk bonds and the original junk bond indices. About 75% of bonds in the fallen angel category are rated BB and therefore have lower credit risk. The average 12-month default rate for Fallen Angels is 3.51%. This compares favorably to 4.51% of high yield bonds originally issued and 4.22% for all high yield bonds,” according to the Corporate Finance Institute (CFI).

What sets Fallen Angels, including ANGL components, apart is that these bonds are issued with investment grade ratings and are then downgraded to junk status. This plays a central role in the aforementioned superior credit quality and default rates, and because of these two enviable characteristics, fallen angels typically outperform standard high-yield corporate debt over long holding periods.

“While the downgrade may be viewed as negative, fallen angels are attractive to contrarian investors who wish to capitalize on the entity’s ability to recover. They are considered to be above average investment grade bonds. high-yield bonds because they have the potential to bounce back to investment grade Lapsed angel issuers are usually larger, more mature companies with well-known brand names, so they usually have the resources to help them bounce back to investment grade,” added CFI.

The $3.4 billion ANGL holds 220 bonds, of which 85.52% are rated BB. ANGL’s duration is 5.81 years. This is medium term territory, which could indicate that the fund’s difficulties in 2022 are too severe as it is clearly not a longer dated fixed income fund. Moreover, this medium-term status is a point in favor of portfolio diversification because bonds with this type of duration are generally less correlated to equities than bonds with longer maturities.

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