VanEck Vectors Fallen Angel High Performance Bond ETF (NASDAQ: ANGL) is an index ETF that invests in Fallen Angels, discounted corporate bonds. Fallen Angels tend to outperform corporate bond rates, as forced selling causes these stocks to trade abnormally. low prices and returns, leading to higher market returns for shareholders. Fallen Angels, like most corporate bonds, see long-term benefits from rising interest rates and should therefore see an increase in yields and returns in the coming years. ANGL is a buyout and one of the strongest corporate bond ETFs on the market today.
In addition, the iShares Fallen Angels USD Bond ETF (FALN) ETF is a very similar ETF, investing in the same niche, and with similar features and investment thesis.
Fallen Angel overview and analysis
ANGL invests in Fallen Angels, a very specific type of corporate bond. To understand ANGL we must first understand what Fallen Angels are and how they relate to other corporate bonds.
Corporate bonds are generally divided into two segments. Investment grade bonds, issued by companies with a solid financial situation and a low probability of default, and without investment grade, issued by companies with a weaker financial situation, and with comparatively higher probability of default. Defaults are valued for both segments of bonds, but bonds without a degree of investment are much riskier independently.
Some institutional investors and index funds are restricted from investing in non-investment grade bonds, due to their high default rates, and therefore focus on investment grade bonds. As an example, the Federal Reserve bought billions in corporate bond ETFs in 2020, almost all of which focused on investment grade corporate bonds. The largest shareholding in the Federal Reserve was the iShares iBoxx $ (LQD) corporate grade bond ETF, the benchmark investment grade ETF, with a massive $ 6 million investment month. The Federal Reserve also invested in some high-yield corporate bond ETFs, but the amounts were significantly lower. As an example, the Federal Reserve invested tens of millions in ANGL, two orders of magnitude less than LQD.
Federal Reserve investment decisions were based (mostly) on legal, regulatory, and reputational concerns: you can’t have a government entity investing in risky values, it doesn’t look good. Financial considerations are secondary: Institutional investors will not decide to simply focus on junk bonds because yields are good. There are many other institutional investors with similar limitations, including many pension funds and the like. This creates above-average arbitrage / yield opportunities in the bond market. Fallen angels are one such opportunity.
Fallen Angels are downgraded corporate bonds with an investment grade to a non-investment grade credit rating, which is caused by deteriorating financial, industrial and economic conditions. Prior to the downgrade, these securities were investment grade and therefore there was a strong demand from institutional investors. Strong demand kept prices high and yields low. Following its downturn, strong demand is becoming a major selling pressure as institutional investors sell their rebate bonds. Sellers are insensitive to prices. LQD will they sell their discounted bonds at more or less the price they can get, because it is an index fund with clear and explicit investment rules and does not invest in bonds without a degree of investment. Other institutional investors will follow suit.
Significant selling pressure from price-insensitive sellers causes prices to fall sharply, and more than fundamentals, which represents an opportunity for investors. Lower prices mean higher returns, mechanically, and more potential capital gains, assuming prices recover, so Fallen Angel investors should see solid returns that outperform the market. This has, in fact, been the case, with Fallen Angels surpassing the most relevant bond rates for decades, and by a fairly large margin.
Fallen Angels significantly outperform corporate bonds without a degree of investment while having comparable levels of risk and volatility. Because of this, and as can be seen above, Fallen Angels have stronger risk-adjusted returns than most other asset classes, including bonds. i actions.
ANGL itself focuses on fallen angels and therefore acts in line with the above. The fund has surpassed significantly in relation to all its peers since its inception, as expected.
ANGL’s entire investment thesis is based on the strong expected and realized performance of its underlying sub-asset class, Fallen Angels. I’ll take a closer look at the fund itself, but the above is basically the whole fundraising thesis.
ANGL – Fundamentals
- Investment Manager: VanEck
- Underlying index: ICE US Fallen Angel High Yield 10% Constrained Index
- Expenditure ratio: 0.35%
- Dividend yield: 4.61%
- Total return CAGR 10 years: 7.20%
ANGL – Overview
Strategy and participations
ANGL is an index ETF that invests in dollar-denominated Fallen Angel corporate bonds. The fund tracks the ICE US Fallen Angel High Yield 10% Constrained Index, an index of those same values. This is a broad index, which results in a reasonably well-diversified fund, with investments in 220 securities and exposure to the most relevant segments of the sector. The fund focuses on US issuers, but has some exposure to dollar-denominated securities from other developed markets. The fund focuses on bonds with a BB rating, the highest rating with no investment grade, as is usual in these funds.
The diversification of ANGL reduces the risk and volatility of the portfolio and is a benefit to the fund and its shareholders.
ANGL has a bit of energy overweight, with a 29% allocation to this industry. ANGL’s overweight energy position is, in my view, a reflection of the fund’s entire investment strategy and thesis. ANGL is overweight as many energy corporations were downgraded in 2020-2021 as the coronavirus pandemic caused a significant reduction in energy prices. Energy prices have since recovered, as have the fortunes of industry, finance and balance sheets. Improving fundamentals should lead to credit upgrades and higher energy bond prices, which will ultimately lead to significant capital gains and returns for ANGL and its investors.
In addition to the above, it does not stand out much more about the fund, its strategy or its holdings.
ANGL currently offers investors a reasonably good return of 4.6%. It is not a particularly strong performance in absolute terms, but it is slightly higher than most bond rates. ANGL yields slightly less than most corporate bond index ETFs without an investment grade, although the difference is not particularly significant.
On a more positive note, ANGL’s underlying holdings generate more than 4.6% of revenue. The fund’s bonds have an average coupon interest rate of 5.4%, well above the fund’s dividend yield. ETFs almost always distribute all income to shareholders, so if ANGL’s underlying holdings generate 5.4% interest, the fund’s return is expected to increase by around 5.4% in the coming months. . ANGL’s dividend has experienced some growth in recent months, but fund distributions have little bit volatile, so this growth could be a random outbreak of volatility.
ANGL’s dividend yield is reasonably good, but definitely not great, nor is it particularly high for a high-yield corporate bond ETF. If the background really shines is in its total performance. Let’s take a look.
ANGL’s performance trajectory is quite solid, as the fund has significantly outperformed all relevant sub-asset bond classes since its inception. Higher returns have been driven entirely by higher capital gains, in line with the fund’s strategy and holdings.
On a more negative note, the fund’s performance has worsened in the last year, with the fund slightly with a lower performance than most of his teammates for the same. In my opinion, performance will improve once economic conditions stabilize, allowing bonds to recover in price. That has this has been the case since the creation of the fund, and I believe that the fund’s strategy is still as effective as ever.
ANGL’s strong performance history is a significant benefit for the fund and its shareholders, and the fund’s basic investment thesis.
Conclusion – Strong purchase
ANGL invests in Fallen Angels, corporate bonds with a track record of decades of market shareholder returns. The fund is a buyout and one of the strongest corporate bond ETFs available on the market today.