It’s not the best of times nor is it the worst for high-yield corporate bonds as the Markit iBoxx USD Liquid High Yield Index is higher by 1% year-to-date. Still, some advisors and investors are pensive about allocating to junk bonds, amid fears that rising interest rates and higher default rates will punish the asset class. Those fears are valid considerations, but there are ways to embrace non-investment grade corporates while tempering risk. Enter the VanEck Fallen Angel High Yield Bond ETF (ANGL ).
In simple terms, a fallen angel bond is one originally issued with an investment-grade rating that’s later downgraded to junk status. Not only does that make ANGL holdings different from standard junk bonds, it implies fallen angels have superior quality profiles relative to bonds originating in junk territory. ANGL’s quality traits could prove increasingly important this year.
“Thinking about fundamentals, we’ve had now three consecutive quarters of margin pressure across corporate America on a year-over-year basis,” noted William Springman of BNP Paribas. “We’ve seen three consecutive quarters of earnings declines. But you have to think about what the starting point looked like prior to this margin degradation. Corporates were in a position of overearning and frankly, they still are.”
The $2.8 billion ANGL holds 209 fallen angels, 81.10% of which are rated BB, according to VanEck data. That’s the highest tier of the non-investment grade spectrum and while that’s not perfect in terms of credit quality, it can be seen as a sign that ANGL holdings are at less risk of default than lower-rated bonds featured in traditional junk bond ETFs.
As Springman observed, sector considerations are relevant for investors evaluating high-yield corporates. That’s all the more meaningful when mulling broad-based ETFs such as ANGL.
“There is growing dispersion just in terms of corporate health. A couple of examples of this, healthcare being one. There are names in the sector in the high-yield space that are distressed. You have seen distress levels rise in that sector. Chemicals is another sector that has had issues. Others have done well, including energy, which hasn’t been on such solid footing in many years. You have to dig into the details to see what’s going on,” he said.
Nearly 27% of ANGL’s holdings are energy issues. Conversely, just 5.52% of the ETF’s roster hails from the healthcare and materials sectors. The average maturity of ANGL holdings is 9.80 years and the ETF sports a 30-day SEC yield of 7.03%.
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