Forbes: How to Make Money on Sickly Bonds
24 February 2023
Read Time 1 MIN
Head of Fixed Income ETF Portfolio Management Fran Rodilosso’s philosophy is “Go where the yield is.” In this Forbes feature, Fran explains what this means and the process behind VanEck’s fallen angel high yield bond strategy.
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.1 Unlike other high yield bonds, fallen angel bonds are issued by larger and more established companies, which have a higher likelihood of being upgraded to investment grade. This makes them a contrarian investment option for those seeking exposure to high yield bonds that have been subjected to significant selling pressure.
Attractive Opportunity Set in Fallen Angel High Yield Bonds
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 experienced a drop in value prior to being downgraded to high yield, followed by a recovery once they have been downgraded. This dynamic creates a compelling opportunity for a rules-based approach.
Benefits of a Systematic Approach
Investing in fallen angels requires thick skin. Catching angels as they fall means buying into sectors that most other investors are avoiding. The VanEck Fallen Angel High Yield Bond ETF (ANGL) portfolio is completely rules-based, which may mean going against the market—and your instincts. ANGL mechanically buys bonds as soon as they get downgraded from high-quality to junk and sells any bond that gets upgraded from junk to high-quality. In aggregate, this systematic approach has been a reliable method for fallen angel investors to achieve outperformance compared to the broader high yield market historically.
Read the full article here: How to Make Money on Sickly Bonds.
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).