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A Heavenly High-Yield Destination

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April 13, 2016 2:19 pm
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A Heavenly High-Yield Destination

High-yield corporate bond exchange-traded funds are back in style this year. That much is confirmed by the rising tide of assets into these ETFs coupled with the surge in volume.

Of course, the pillars of the junk bond ETF community are raking in the assets and garnering plenty of attention in the financial media, but the Market Vectors Fallen Angel High Yield Bond ETF (Market Vectors ETF Trust (NYSE: ANGL)) merits a place in this conversation.

Fallen Angels

Fallen angel bonds, such as the nearly 250 held by ANGL, are bonds that when issued had investment-grade ratings but eventually get downgraded to junk territory. Getting down to what really matters, in this case that being yield and returns, investors do not sacrifice any of either with ANGL.

Related Link: Earning Its Wings: Fallen Angel ETF Tops $100 Million In Assets

Fallen angels “have significantly outperformed the broad corporate high yield bond market in 2016. As of March 18, 2016, the BofA Merrill Lynch US Fallen Angel High Yield Index returned 7.1 percent year to date, nearly twice the 3.6 percent return from the BofA Merrill Lynch US High Yield Index. Fallen angels’ outperformance in 2016 had been due primarily to their greater exposure to the basic industry and energy sectors and higher average credit quality,” according to a statement issued by Market Vectors.

ANGL

Plus, ANGL carries a 30-day SEC yield of 7.31 percent. That is better than what investors will find on some traditional high-yield bond ETFs.

In some ways, ANGL can be seen as an “all-weather” high-yield bond ETF. ANGL stood tall last year when its more traditional rivals floundered as junk debt from energy and materials issuers plagued the high-yield market. But many of those issues became fallen angels, gaining them entry into ANGL. Now that those bonds are rebounding, ANGL is benefiting as highlighted by a year-to-date gain of almost 7 percent.

“Relative to the broad high yield bond market, fallen angels' recent outperformance was primarily due to their higher average allocations to the basic industry and energy sectors. Both of these sectors' bonds appreciated in the first quarter, as oil prices recovered approximately 46 percent since mid-February,” according to a recent Market Vectors note.

Energy's footprint in the high-yield bond market is growing, but that growth is especially pronounced within ANGL, meaning this is one bond ETF that would benefit from a sustained rally in oil prices.

“Over the first quarter, fallen angels' energy allocation grew from about 13 percent to 25 percent, while the broad high yield bond market's went from approximately 11 percent to 13 percent,” added Market Vectors. “The overweight bias occurred as a result of the energy sector’s struggles in 2015, which led to investment grade energy companies suffering credit deterioration being downgraded to high yield.”

Image Credit: Public Domain


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