Key Takeaways:

• Fallen angels outperformed broad high yield by 0.53% YTD, driven by security selection and duration. This marks 15 years of historical outperformance out of the last 22 calendar years^*.
• There were 10 fallen angels in 2025 vs 7 risings stars.
• JP Morgan estimates $84bn of fallen angels in 2026.

Fallen angels outperformed the broad high yield market by 0.53% in 2025 (9.03% vs. 8.50%), despite underperforming in Q4 by 0.25% (1.11% vs 1.35%). In a year marked by macro volatility and shifting rate expectations, fallen angels once again demonstrated their ability to deliver resilient returns through a volatile macro backdrop.

While fallen angels lagged in parts of Q4 amid renewed rate volatility, those short-term headwinds were more than offset by consistent issuer level outperformance earlier in the year. The outperformance in 2025 was driven primarily by security selection within sectors. In particular, some of the newer fallen angels (Basic Industry: Celanese and Huntsman, Autos: Nissan and Aptiv and Consumer Goods: Whirlpool) were top contributors to outperformance vs broad high yield. As has historically been the case, many of these newer fallen angels entered the high yield market at discounted prices following forced selling, creating attractive entry points ahead of a technical recovery. Duration also contributed positively to outperformance as fallen angels were on average 1.7 years longer than high yield. 2025 marks 15 years of outperformance out of the last 22 calendar years for fallen angels’ over broad high yield.

2025 Total Returns

Source: ICE Data Services, VanEck.

2025 in Review

• Fallen angels outpaced rising stars in 2025 for the first time since 2020. Fallen angel activity reflected idiosyncratic credit migration rather than broad-based sector downgrades. Fallen angels added more than $22bn to the index market value while rising stars removed approximately $5bn, which contrasts with the pattern seen in the prior years.
• The Basic Industry sector was most impacted by fallen angels, as Celanese, Huntsman International and FMC Corp added approximately $10bn. No rising star removed more than $1bn of face value. The fallen angel index finished 2025 with Basic Industry, Retail, Telecom and Autos as the sectors with more than 10% each of exposure. These will be the sectors to watch in 2026 as they, combined, represented more than 50% of the fallen angel index.
• Investors closely monitored President Trump’s feed, tariffs announcements, and inflation and labor market indicators. Towards the middle to end of the year, Fed rate cuts expectations took center stage. This resulted in continued yield curve steepening (2-10s), which began in 2023, from 32bps to 71bps. The 2Y yield decreased the most to 3.47% while the 30Y yield increased slightly to 4.84%.
• Corporate balance sheets remained strong in 2025. Fallen angels had no defaults while the broad high yield market had 7 issuers for a total number of 14 bonds, adding to $14.2bn of face value. The absence of defaults among fallen angels in 2025 highlights the higher-quality bias of the segment, particularly when compared with pockets of stress that persisted in the lower-rated tiers of high yield.
• Credit spreads were volatile in the beginning of the year but ended very close to where they started and below long-term historical averages. IG spreads tightened by 3bps to 79bps, HY tightened by 11bps to 281and fallen angels tightened by 4bps to 245.

2026 Expectations

• We believe that long-term rates are unlikely to significantly decrease but short-term rates may decline modestly as monetary policy becomes friendlier. Interest rates are closer to neutral with the median dot plot only showing one 25bps rate cut in 2026.
• Fallen angels’ yield of 6.36%, though lower than at the beginning of 2025, is still above the 5y and 10y averages, offers higher quality compared to the past 10 years. Spreads continue to be tight but the higher quality of fallen angel’s vs broad high yield, may play in our favor if spreads were to widen. Spreads are still a very low percentage of overall yield (currently at 39%), so movements in Treasury yields will likely drive price returns.
• Balance sheets remain strong, which give credit markets the ability to absorb slower growth, as many are expecting, in 2026 without demanding wider spreads. While absolute spreads remain tight, fallen angels enter 2026 with a healthy credit profile, suggesting less downside asymmetry should growth slow or volatility resurface.
• In terms of rating migrations, 2026 is expected to remain idiosyncratic in nature as there is no specific sector on watch for widespread downgrades. As it occurs with downgrades, fallen angels are offering distinct sector exposures vs the high yield market.
• JP Morgan expects approximately $84bn of fallen angels, though the majority of this number is tied back to potential downgrades of Ford and Paramount. Importantly, much of the projected downgrade volume remains concentrated in a small number of large issuers, limiting the likelihood of broad-based pressure across the high yield market.
• Consistent with broader high yield forecasts, we expect returns in 2026 to be driven more by carry and rate movements than by spread compression, but with downside risks that may arise from unexpected labor market weakness, another flare up in broader credit concerns or a host of political or geopolitical factors. Given how tight spreads are, we see little upside from further spread tightening from here.

As we start 2026, we believe fallen angels have the potential to perform well in the context of a lower-growth, rate-sensitive environment, supported by higher quality and attractive yields with a history of outperformance.

Fallen Angels Overall Statistics: Credit spreads widened early to mid-October as trade tensions resurfaced, the US government was shut down but tightened back at the end as the Fed delivered a cut. November was somewhat similar as spreads widened early in the month but then trended back down to finish the year very close to where they started it. Volatility elevated, particularly in first half of the year. Liberation Day in April, the second round of tariffs in August, and the Government shut down all contributed to spread volatility this year. Ultimately, fallen angel spreads ended just 4bps tighter while broad high yield spreads ended 11bps tighter than at the beginning of the year. Yields followed the spreads path outlined above, as they reach year highs in early April (7.69 for fallen angels and 8.66 for broad high yield) but then trended back down to finish the in 6-handle. Both finished the year close to their multi-year lows, especially broad high yield as it is reaching levels not seen since early 2022. Fallen angels’ duration was flat during the quarter, while broad high yield continued to hit all-time lows (2.80) during the year as issuers deferred refinancing. Duration was a major contributor to outperformance this past year, as fallen angels were longer, on average, 1.7 years longer than high yield.

Source: ICE Data Services, VanEck. Fallen Angels: ICE US Fallen Angel High Yield 10% Constrained Index. Broad HY: ICE BofA US High Yield Index. OAS refers to “option-adjusted spread.” Please see definition for this and other terms referenced herein in the disclosures and definitions portion of this blog. Past performance is no guarantee of future results. Index performance is not representative of strategy performance. It is not possible to invest in an index.

Fallen Angels: There was only one fallen angel in Q4: FMC Corp, that joined in the index in November. It was downgraded by S&P due to persistently weak credit metrics and rising uncertainty around its future earnings and cash flow. It entered the index at $82.45, a decline of approximately 6% over the last 6 months. FMC marked the 10^th fallen angel in 2025, which combined added more than $22bn to the index market value which is the largest amount of fallen angels since the 2020 Covid downgrade. This time around, it was the Basic Industry sector that brought in the higher exposure of fallen angels and now comprised the largest exposure within the fallen angel index.

FMC Corp Bonds Average Price:

Source: ICE Data Services, VanEck.

With 2025 over, JP Morgan updated its forecast and expects approximately $85bn of index eligible debts to be downgraded. Note that the bulk of this figure continues to be Paramount, Ford and Centene.

Source: ICE Data Services, VanEck. Fallen Angels: ICE US Fallen Angel High Yield 10% Constrained Index. Past performance is no guarantee of future results. Not a recommendation to buy or sell any of the names/securities mentioned herein. Index performance is not representative of strategy performance. It is not possible to invest in an index.

Rising Stars: There were 4 issuers upgraded from high yield to investment grade in Q4, with a total of 7 rising stars issuers in 2025.  Topaz Solar Farms was upgraded by Fitch in October to BBB- from BB+ as its sole revenue counterpart (PG&E) was also upgraded. In November, Standard Chartered PLC Tier 1 notes were upgraded by S&P, after it reappraised the defaults risk of several European bank capital requirements. Finally, December had two rising stars: Spirit Aerosystems, which was upgraded as Boeing completed its acquisition and with Boeing guaranteeing Spirit’s debt and integrating it as a core subsidiary, and Toledo Hospital which was upgraded by Moody’s and S&P on significant operational improvement. These 4 rising stars provided an approximately 6% price return over the last 12 months while in the index. Overall, 2025 rising stars removed approximately 8.4% of the index market value.

Source: ICE Data Services, VanEck. Fallen Angels: ICE US Fallen Angel High Yield 10% Constrained Index. Past performance is no guarantee of future results. Not a recommendation to buy or sell any of the names/securities mentioned herein. Index performance is not representative of strategy performance. It is not possible to invest in an index.

Fallen Angels Performance by Sector: Q4 brought minor changes to the sector composition of the fallen angel index. Basic Industry added more than 3% with the addition of FMC Corp in November and continues to be the largest exposure. Retail increased by approximately 1.5%, but its exposure is significantly less than at the beginning of the year. Banking, Capital Goods and Healthcare saw their exposure shrink by more than 1% throughout the quarter and the Services sector no longer has exposure, as the sole bond from Steelcase was removed from the index as HNI Corporation acquired Steelcase and its debt was exchanged. The fallen angel index spread widened by 15bps in Q4, but it was relatively flat for the year. In Q4, the Media sectors spreads widened by more than 100 bps (it is just a small issue from Warner Bros Discovery) while the Retail sectors spreads tightened by 21bps and provided the highest total return for Q4 (2.82%). For 2025, all sectors except Tech provided positive total returns with Real Estate being top performer with 15% return. Retail, Real Estate and Basic Industry were the top contributors to relative performance vs broad high yield during the year, while Media, Services and Healthcare detracted the most from relative performance. For 2026, Basic Industry, Retail, Telecom and Autos should be drivers of returns as they combined approximately 55% exposure within the fallen angel index.

^*Does not have securities for all months. Returns are based on partial period data.

Source: ICE Data Services, VanEck.^*Returns are based on partial period data. Fallen Angels: ICE US Fallen Angel High Yield 10% Constrained Index. Not intended as a recommendation to invest or divest in any of the sectors mentioned herein. Index performance is not representative of strategy performance. It is not possible to invest in an index.

Fallen Angels Performance by Rating: The fallen angel index continues to be dominated by BB-rated bonds which saw a small increase year over year. Fallen angels continue to have higher concentrations of BB-rated bonds with approximately 30% more. In terms of relative performance vs broad high yield, BB-rated were the only contributors to outperformance as lower rated bonds detracted from performance.

Source: ICE Data Services, VanEck. Fallen Angels: Fallen Angel High Yield 10% Constrained Index. Not intended as a recommendation to invest or divest in any of the sectors mentioned herein. Index performance is not representative of strategy performance. It is not possible to invest in an index. BB index: ICE BofA BB US High Yield Index; Single-B index: ICE BofA Single-B US High Yield Index; CCC & Lower rated index ICE BofA CCC & Lower US High Yield Index.

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