An Interesting Corner of the High-Yield Bond Market Beckons

Investors looking for added income in the bond market — without taking on significantly more risk — will often venture to corporate debt. That search can also include high-yield fare, particularly at times when the broader economy is solid and default rates are low.

Not to be overlooked, are fallen angel bonds (corporate bonds born with investment-grade ratings that are later downgraded to junk status.) Thanks to ETFs, including the VanEck Fallen Angel High Yield Bond ETF (ANGL) —the pioneer among fallen angel ETFs — these bonds are accessible in broad, efficient form.

The $3.07 billion ANGL, which turned 15 years old last week, sports a tempting 30-day SEC yield of 6.69%. Alone, that’s enough to get plenty of advisors and fixed income investors interested. Plus, ANGL has beaten the broader high-yield bond market in 15 of the past 22 years, according to VanEck. There are more compelling reasons to consider ANGL today.

ANGL Yield Setup Unusually Attractive

It’s not often that fallen angels sport yields in the 7% range. However, that is the state of affairs today and it could be a harbinger of good things to come. Specifically for this asset class and ANGL.

“Looking ahead into the remainder of the year, fallen angel yields of north of 7% provide attractive income levels as they are now above the 1Y, 3Y, 5Y, 10Y, and since December 2003 average,” noted Nicolas Fonseca of VanEck. “We continue to expect returns for the remainder of the year to be driven more by carry and interest rate movements, as spreads, despite widening to end the quarter, are still relatively tight but have been getting closer to their 10Y average.”

As Fonseca pointed out, fallen angel prices recently slipped, pushing spreads and yields higher. However, the silver lining is that such setups in the past have often led to upsides for these bonds.

“With the increase in yield and spreads, fallen angel prices decreased to below $90, which we are watching closely as the more than $5 gap between broad high yield and fallen angels has been a sign of outperformance in the past,” said the VanEck product manager. “Outperformance has been approximately 1% and 2% for the forward 1Y and 3Y periods.”

ANGL has an effective duration of 4.63 years and holds 133 bonds, nearly half of which are issued by companies in the consumer discretionary and materials sectors. More than 72% of the ETF’s holdings are issued by American companies.

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