ETF Talk: A Fallen Angel ETF Appears Ready for Redemption

With the current state of affairs, it is especially hard for anyone, even me, to predict the future.

Conflicts like the clashes between Israel and Hamas in Gaza and the war taking place between Russia and Ukraine affect countries throughout the globe beyond the territories of turmoil and United States. Because of this, investors are searching for investment opportunities outside of the norm.

As mentioned in my previous ETF talks, one of these investment strategies involves trading “fallen angel bonds.” This week’s exchange-traded fund (ETF) features iShares Fallen Angels USD Bond ETF (NASDAQ: FALN). Allow me to describe its purpose.

The two types of bonds to focus on here are investment-grade and high-yield. A fallen angel is an investment-grade bond whose value drops to high-yield status because of a credit downgrade. High-yield bonds pay heightened interest rates, but are riskier to hold, as well as have a higher chance of default.

Since a bond’s credit rating is permeable, it can change based on the economic status of the issuer. When the credit rating of a previously investment-grade bond deteriorates to high-yield status, we call it a fallen angel bond.

Now, you may wonder, why invest in them?

Fallen angel bonds bring about several benefits. One of them is diversification. In a recent study from Bloomberg, in the long-term, fallen angels outperform the broad investment-grade (IG) and high-yield (HY) market. Obviously, past performance is not a guarantee of future performance, but this study can shed some light on how the fallen angel bonds have held up.

The iShares Fallen Angels USD Bond ETF (NASDAQ: FALN) allows for exposure to a subset of high-yield bonds that were previously recognized as investment-grade. This ETF can be used by investors to try to capture the potential opportunity for profits that can become possible when a bond is downgraded from investment grade.

Exclusive Three Defense Investments with Potential to Outperform

Some of the top holdings in FALN’s portfolio are Vodafone Group PLC (NASDAQ: VOD), Western Digital Corporation (NASDAQ: WDC), Newell Brands Inc. (NASDAQ: NWL) and Nordstrom Inc. (NYSE: JWN).

Chart courtesy of www.stockcharts.com.

As of June 11, FALN has climbed 2.3% year to date and has a 1-year return of 11.4%. The fund further has amassed $1.7 billion in assets under management and has an expense ratio of 0.25%.

Overall, the FALN ETF may be a good choice for investors looking for exposure to the fallen angel bond sector, but it is wise to consider the risks and potential returns before making any investment decisions.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to email me. You may see your question answered in a future ETF Talk.

Jim Woods

Jim Woods is a 20-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor. Jim is the editor of Forecasts & Strategies, Tactical Trader, TNT Trader, Five Star Trader, Bullseye Stock Trader, and The Deep Woods. His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. His articles have appeared on many leading financial websites, including StockInvestor.com, InvestorPlace.com, Main Street Investor, MarketWatch, Street Authority, Human Events and many others. Jim formerly worked with Investor’s Business Daily founder William J. O’Neil, helping to author training courses in the CANSLIM stock-picking methodology. The independent firm TipRanks rates Jim the No. 3 financial blogger in the world (out of more than 6,000). TipRanks calculates that, since 2012, he's made 361 successful recommendations out of 499 total, earning a success rate of 72% and a +15.3% average return per recommendation. He is known in professional and personal circles as “The Renaissance Man,” because his expertise includes such varied fields as composing and performing music; Western horsemanship, combat marksmanship, martial arts, auto racing and bodybuilding. Jim holds a BA in philosophy from the University of California, Los Angeles, and is a former U.S. Army paratrooper. A self-described “radical for capitalism,” he celebrates the virtue of making money from his Southern California horse ranch.