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An Important Change For The Fallen Angel ETF

by
September 26, 2016 3:05 pm
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The VanEck Fallen Angel High Yield Bond ETF (Market Vectors ETF Trust (NYSE: ANGL)), one of this year's hottest fixed income exchange-traded funds, is undergoing an important change later this month.

In a move aimed at enhancing liquidity, ANGL's underlying index, BofA Merrill Lynch US Fallen Angel High Yield Index (H0FA), is significantly increasing the amount outstanding required for individual issues to join the index from to a minimum of $250 million from a minimum of $100 million.

“As a result, approximately 7.4 percent of the current Index will be eliminated. We see this as a positive move that should help improve the overall liquidity of the Index’s universe, while imposing relatively minimal impact on potential performance and composition,” said VanEck in a recent note.

The Concern Over Liquidity

In various surveys polling institutional and other professional investors about fixed income ETFs, liquidity often appears as one their most frequently-cited concerns. That is particularly true with high-yield bonds, of which fallen angels are, because many individual issues this bond genre are not sufficiently liquid, a scenario that explains investors' growing preference for ETFs over individual junk bonds.

Related Link: Fallen Angel ETF Still Angelic As Oil Prices Slump

VanEck said ANGL's new expense ratio is 0.35 percent, or $35 per $10,000 invested. In March, VanEck revealed that ANGL topped $100 million in assets under management. In less than three months, ANGL's assets have swelled to $330 million.

Fallen angel bonds are debt that comes to market with investment-grade ratings only to later be downgraded to junk status. There are tangible benefits to ANGL's index making the aforementioned change.

“The rule change will help promote the Index’s liquidity by eliminating a number of very small components that tend to be less liquid and difficult to trade relative to larger issues. This is likely to have two very positive effects.

“First, market makers in the ANGL ETF will no longer see bond issues smaller than $250 million in creation and redemption baskets, with positive ramifications for their estimated cost of trading those baskets. Second, eliminating hard-to-trade smaller positions from the underlying Index could help improve ANGL’s tracking error, as the ETF may now be more closely aligned with the Index’s constituency,” according to VanEck.

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