You don’t need me to tell you that we live in an uncertain world. The war between Russia and Ukraine is continuing to rage, as is the conflict between Israel and Hamas. As the effects of both conflicts have long since percolated beyond their respective countries’ borders, more than a few investors are turning to less-well-known investment strategies in order to protect their hard-earned capital.
One of these investment strategies involves the trading of so-called “fallen angel bonds,” and it behooves us to talk a little bit about what they are before diving into this week’s exchange-traded fund (ETF).
Two kinds of bonds concern us here — investment-grade and high-yield bonds. Investment-grade bonds are rated the best and are the most probable to give you your money back if you hold them to maturity. High-yield bonds have higher interest rates but are riskier to hold (as indicated by their lower credit ratings) and have a higher chance of default.
Now, a bond’s credit rating isn’t fixed like a star in a constellation. It can change based on the economic status of the issuer. When an investment-grade bond falls from grace and becomes a high-yield bond as a result of a credit downgrade, we refer to it as a fallen angel bond.
But why invest in them?
That’s a good question, and one of the main reasons for doing so is for diversification. A 2024 study by Bloomberg showed that, when comparing the Bloomberg US HY Fallen Angel 3% bond index and the Bloomberg US Corporate High Yield Index to the S&P 500 Total Return Index over 10 years, investing researchers found that there was a lower correlation between fallen angels and equities than high-yield bonds and equities. A report by BlackRock also noted that, over the long term, fallen angels as a whole have outperformed the broader investment-grade and high-yield bond markets, only underperforming in part of 2016 and part of 2020.
Of course, as always, past performance is not a guarantee of future performance.
One exchange-traded fund (ETF) dedicated to fallen angel bonds is the VanEck Fallen Angel High Yield Bond ETF (NASDAQ: ANGL). It focuses on below investment-grade corporate bonds denominated in dollars, issued in the United States and that were rated investment-grade at the time of issuance. ANGL seeks to replicate the ICE US Fallen Angel High Yield 10% Constrained Index.
Some of the firms whose bonds are in ANGL’s portfolio include Vodafone Group Plc (NASDAQ: VOD), Newell Brands Inc. (NASDAQ: NWL), Entegris Inc. (NASDAQ: ENTG), Walgreens Boots Alliance Inc. (NASDAQ: WBA), Dresdner Funding Trust I, Telecom Italia Capital Sa (OTCMKTS: TIIAY), Resorts World Las Vegas Llc, Eqm Midstream Partners and Nordstrom Inc. (NYSE: JWN).
As of May 28, ANGL has been up 1.10% over the past month and 0.84% for the past three months. It is currently up 0.99% year to date.
Chart courtesy of www.stockcharts.com
The fund has amassed $3.07 billion in assets under management and has an expense ratio of 0.25%.
Overall, the ANGL ETF may be a good choice for investors looking for exposure to the fallen angel bond sector, but it’s important to carefully 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 send me an email. You just may see your question answered in a future ETF Talk.
