Fallen Angel Bonds: Higher Quality High Yield
March 21, 2023
Read Time 4 MIN
Fallen angel high yield bonds are part of the overall high yield universe but unique in that they were originally issued with investment grade ratings and later downgraded to non-investment grade, or high yield. Fallen angel bonds provide a distinct value proposition that sets them apart from the broad high yield market.1 The distinction between the high yield bond market and the much larger investment grade market, with unique investor bases and issuers, creates a structural inefficiency when a bond crosses over from one category to the other. Historically, bonds have declined in price prior to being downgraded to high yield, and recovered following the downgrade. Systematically investing in these undervalued bonds has been a source of outperformance for fallen angel investors historically, while also resulting in unique sector exposures and higher overall credit quality2 relative to the broad high yield market as measure by ICE BofA High Yield Index. Learn more about how the VanEck Fallen Angel High Yield Bond ETF (ANGL®) can offer investors an efficient way to access this unique segment.
High Yield Bonds Through the Cycle
The unique performance drivers of fallen angel bonds (systematically buying oversold bonds, differentiated sector exposure and higher credit quality) have driven outperformance versus the broad high yield in 14 out of the last 19 years.3 This outperformance has occurred in different market environments, illustrating an attractive consistency of outperformance. Further, fallen angels have historically outperformed in environments with both rising and declining interest rates, and in widening and very tight spread environments. This all-weather outperformance is a result of the different role each performance driver can play in various stages of a market cycle.
Fallen Angel High Yield Bond Batting Average Increases with Time (1/31/2004 – 12/31/2022)
| 1 Month Rolling Periods |
6 Month Rolling Periods |
1 Year Rolling Periods |
3 Year Rolling Periods |
5 Year Rolling Periods |
7 Year Rolling Periods |
10 Year Rolling Periods |
|
| Total Periods | 228 | 223 | 217 | 193 | 169 | 145 | 109 |
| Total Outperformed | 136 | 155 | 160 | 178 | 167 | 145 | 109 |
| Batting Average (%) | 60 | 70 | 74 | 92 | 99 | 100 | 100 |
Source: Morningstar. Past performance is not indicative of future results. See disclaimers and index descriptions at the end of this presentation. Fallen Angel U.S. High Yield by the ICE US Fallen Angel High Yield 10% Constrained Index (H0CF) and Broad U.S. High Yield by ICE BofA High Yield Index (H0A0). Fallen Angel U.S. High Yield index data on and prior to February 28, 2020 reflects that of the ICE BofA US Fallen Angel High Yield Index (H0FA). From February 28, 2020 forward, the Fallen Angel U.S. High Yield index data reflects that of the Fund's underlying index, the ICE US Fallen Angel High Yield 10% Constrained Index (H0CF). Fallen Angel U.S. High Yield index data history which includes periods prior to February 28, 2020 links H0FA and H0CF and is not intended for third party use.
Batting Average is measured by dividing the number of periods a portfolio or investment strategy outperforms a benchmark by the total number of periods.
Not All High Yield Bonds Are Created Equal
Fallen angels stand apart from original-issue high yield bonds, offering a higher quality, high yield bond strategy that has historically outperformed the broad high yield bond market, including actively managed funds. Fallen angel high yield bonds, historically, tend to be issued by larger, more established companies, have a higher rate of upgrades to investment grade4 and offer a contrarian approach to investing in bonds exposed to heavy selling.
Fallen Angel Bonds vs. Broad High Yield Bonds Returns
Source: ICE and Morningstar. Data as of 12/31/2022. This chart is for illustrative purposes only. Index performance is not illustrative of fund performance. Fund performance current to the most recent month end is available by visiting vaneck.com. Historical information is not indicative of future results; current data may differ from data quoted. Indexes are unmanaged and are not securities in which an investment can be made. Current data may differ from data quoted. Past performance is no guarantee of future results; VanEck Fallen Angel High Yield Bond ETF commenced on 4/10/2012. An investor cannot invest directly in an index. The results assume that no cash was added to or assets withdrawn from the Index. Index returns do not represent Fund returns. The Index does not charge management fees or brokerage expenses, nor does the Index lend securities, and no revenues from securities lending were added to the performance shown. Broad high yield bond market and active managers are represented by the ICE BofA US High Yield Index and Morningstar High-Yield Bond category average, respectively. See disclaimers and index descriptions at the end of this presentation.
Fallen Angel U.S. High Yield is represented by the ICE US Fallen Angel High Yield 10% Constrained Index (H0CF) and the Broad U.S. High Yield by ICE BofA High Yield Index (H0A0). Fallen Angel U.S. High Yield index data on and prior to February 28, 2020 reflects that of the ICE BofA US Fallen Angel High Yield Index (H0FA). From February 28, 2020 forward, the Fallen Angel U.S. High Yield index data reflects that of the Fund's underlying index, the ICE US Fallen Angel High Yield 10% Constrained Index (H0CF). Fallen Angel U.S. High Yield index data history which includes periods prior to February 28, 2020 links H0FA and H0CF and is not intended for third party use.
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Related Insights
Fallen angels outperformed broad high yield by 0.24% in March and 0.10% YTD, due in part, to tighter spreads. Q1 2024 saw two fallen angels and two rising stars.
April 17, 2024
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April 09, 2024
March 22, 2024
DISCLOSURES
1 Fallen angel bonds represented by the ICE US Fallen Angel High Yield 10% Constrained Index (H0CF) and Broad U.S. High Yield represented by the ICE BofA High Yield Index (H0A0).
2 Historically higher average credit quality and risk-adjusted returns than the broad high yield bond universe, when comparing ICE US Fallen Angel High Yield 10% Constrained Index and ICE BofA US High Yield Index. ICE BofA rating is a proprietary composite of various rating agencies. Risk-adjusted returns are measured by Sharpe ratio, which is a statistical measure of the excess return of a portfolio over a risk-free rate of return (as found with a U.S. Treasury security) per unit of the portfolio’s standard deviation of returns.
3 Source: FactSet. Data as of 12/31/2022. Fallen angel bonds represented by the ICE US Fallen Angel High Yield 10% Constrained Index (H0CF) and Broad U.S. High Yield represented by the ICE BofA High Yield Index (H0A0). Index performance is not illustrative of fund performance. Past performance is no guarantee of future results. An investor cannot invest directly in an index.
4 Source: ICE BofA. Data as of 12/31/2022. Based on average ascension rates to investment grade since 12/31/2003.
Past performance is not a guarantee of future results. Performance current to the most recent month end is available by clicking here.
An investment in the Fund may be subject to risk which includes, among others, high yield securities, foreign securities, foreign currency, credit, interest rate, restricted securities, market, operational, call, Consumer staples, consumer discretionary, energy, communications, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversified and concentration risks, all of which may adversely affect the Fund.
Index returns are not Fund returns and do not reflect any management fees or brokerage expenses. Certain indices may take into account withholding taxes. Investors cannot invest directly in the Index. Returns for actual Fund investors may differ from what is shown because of differences in timing, the amount invested and fees and expenses. Index returns assume that dividends have been reinvested.
ICE US Fallen Angel High Yield 10% Constrained Index (H0CF, Index) is a subset of the ICE BofA US High Yield Index (H0A0, Broad Index) and includes securities that were rated investment grade at time of issuance.
ICE BofA US High Yield Index (H0A0, Broad Index) is comprised of below-investment grade corporate bonds (based on an average of various rating agencies) denominated in U.S. dollars.
Index data on and prior to February 28, 2020 reflects that of the ICE BofA US Fallen Angel High Yield Index (H0FA). From February 28, 2020 forward, the index data reflects that of the Fund's underlying index, the ICE US Fallen Angel High Yield 10% Constrained Index (H0CF). Index history which includes periods prior to February 28, 2020 links H0FA and H0CF and is not intended for third party use.
Morningstar High-Yield Bond Average category is comprised of open-end mutual funds with an investment objective to seek returns via significant exposure to low quality bonds, those that are either unrated or rated by a major agency as BB or lower.
ICE Data Indices, LLC and its affiliates (“ICE Data”) indices and related information, the name "ICE Data", and related trademarks, are intellectual property licensed from ICE Data, and may not be copied, used, or distributed without ICE Data's prior written approval. The licensee's products have not been passed on as to their legality or suitability, and are not regulated, issued, endorsed, sold, guaranteed, or promoted by ICE Data. ICE Data MAKES NO WARRANTIES AND BEARS NO LIABILITY WITH RESPECT TO THE INDICES, ANY RELATED INFORMATION, ITS TRADEMARKS, OR THE PRODUCT(S) (INCLUDING WITHOUT LIMITATION, THEIR QUALITY, ACCURACY, SUITABILITY AND/OR COMPLETENESS).
Performance and characteristics of the ICE US Fallen Angel High Yield 10% Constrained Index (H0CF) are quoted throughout this material. H0CF is not representative of the entire Fallen Angels high yield corporate bond market. H0CF does not represent the performance or yield of the Fund.
Fund shares are not individually redeemable and will be issued and redeemed at their NAV only through certain authorized broker-dealers in large, specified blocks of shares called "creation units" and otherwise can be bought and sold only through exchange trading. Shares may trade at a premium or discount to their NAV in the secondary market. You will incur brokerage expenses when trading Fund shares in the secondary market. Past performance is no guarantee of future results. Returns for actual Fund investments may differ from what is shown because of differences in timing, the amount invested, and fees and expenses. The "Net Asset Value" (NAV) of a VanEck Exchange Traded Fund (ETF) is determined at the close of each business day, and represents the dollar value of one share of the fund; it is calculated by taking the total assets of the fund, subtracting total liabilities, and dividing by the total number of shares outstanding. The NAV is not necessarily the same as the ETF's intraday trading value. VanEck ETF investors should not expect to buy or sell shares at NAV.
Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 888.460.6805 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
Related Funds
DISCLOSURES
1 Fallen angel bonds represented by the ICE US Fallen Angel High Yield 10% Constrained Index (H0CF) and Broad U.S. High Yield represented by the ICE BofA High Yield Index (H0A0).
2 Historically higher average credit quality and risk-adjusted returns than the broad high yield bond universe, when comparing ICE US Fallen Angel High Yield 10% Constrained Index and ICE BofA US High Yield Index. ICE BofA rating is a proprietary composite of various rating agencies. Risk-adjusted returns are measured by Sharpe ratio, which is a statistical measure of the excess return of a portfolio over a risk-free rate of return (as found with a U.S. Treasury security) per unit of the portfolio’s standard deviation of returns.
3 Source: FactSet. Data as of 12/31/2022. Fallen angel bonds represented by the ICE US Fallen Angel High Yield 10% Constrained Index (H0CF) and Broad U.S. High Yield represented by the ICE BofA High Yield Index (H0A0). Index performance is not illustrative of fund performance. Past performance is no guarantee of future results. An investor cannot invest directly in an index.
4 Source: ICE BofA. Data as of 12/31/2022. Based on average ascension rates to investment grade since 12/31/2003.
Past performance is not a guarantee of future results. Performance current to the most recent month end is available by clicking here.
An investment in the Fund may be subject to risk which includes, among others, high yield securities, foreign securities, foreign currency, credit, interest rate, restricted securities, market, operational, call, Consumer staples, consumer discretionary, energy, communications, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversified and concentration risks, all of which may adversely affect the Fund.
Index returns are not Fund returns and do not reflect any management fees or brokerage expenses. Certain indices may take into account withholding taxes. Investors cannot invest directly in the Index. Returns for actual Fund investors may differ from what is shown because of differences in timing, the amount invested and fees and expenses. Index returns assume that dividends have been reinvested.
ICE US Fallen Angel High Yield 10% Constrained Index (H0CF, Index) is a subset of the ICE BofA US High Yield Index (H0A0, Broad Index) and includes securities that were rated investment grade at time of issuance.
ICE BofA US High Yield Index (H0A0, Broad Index) is comprised of below-investment grade corporate bonds (based on an average of various rating agencies) denominated in U.S. dollars.
Index data on and prior to February 28, 2020 reflects that of the ICE BofA US Fallen Angel High Yield Index (H0FA). From February 28, 2020 forward, the index data reflects that of the Fund's underlying index, the ICE US Fallen Angel High Yield 10% Constrained Index (H0CF). Index history which includes periods prior to February 28, 2020 links H0FA and H0CF and is not intended for third party use.
Morningstar High-Yield Bond Average category is comprised of open-end mutual funds with an investment objective to seek returns via significant exposure to low quality bonds, those that are either unrated or rated by a major agency as BB or lower.
ICE Data Indices, LLC and its affiliates (“ICE Data”) indices and related information, the name "ICE Data", and related trademarks, are intellectual property licensed from ICE Data, and may not be copied, used, or distributed without ICE Data's prior written approval. The licensee's products have not been passed on as to their legality or suitability, and are not regulated, issued, endorsed, sold, guaranteed, or promoted by ICE Data. ICE Data MAKES NO WARRANTIES AND BEARS NO LIABILITY WITH RESPECT TO THE INDICES, ANY RELATED INFORMATION, ITS TRADEMARKS, OR THE PRODUCT(S) (INCLUDING WITHOUT LIMITATION, THEIR QUALITY, ACCURACY, SUITABILITY AND/OR COMPLETENESS).
Performance and characteristics of the ICE US Fallen Angel High Yield 10% Constrained Index (H0CF) are quoted throughout this material. H0CF is not representative of the entire Fallen Angels high yield corporate bond market. H0CF does not represent the performance or yield of the Fund.
Fund shares are not individually redeemable and will be issued and redeemed at their NAV only through certain authorized broker-dealers in large, specified blocks of shares called "creation units" and otherwise can be bought and sold only through exchange trading. Shares may trade at a premium or discount to their NAV in the secondary market. You will incur brokerage expenses when trading Fund shares in the secondary market. Past performance is no guarantee of future results. Returns for actual Fund investments may differ from what is shown because of differences in timing, the amount invested, and fees and expenses. The "Net Asset Value" (NAV) of a VanEck Exchange Traded Fund (ETF) is determined at the close of each business day, and represents the dollar value of one share of the fund; it is calculated by taking the total assets of the fund, subtracting total liabilities, and dividing by the total number of shares outstanding. The NAV is not necessarily the same as the ETF's intraday trading value. VanEck ETF investors should not expect to buy or sell shares at NAV.
Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 888.460.6805 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.