Another Boon For Fallen Angel Bond ETFs

In a year in which investors have been led to believe exchange-traded funds holding U.S. government debt are scorching hot (they are), fallen angel bonds funds, such as the VanEck Vectors Fallen Angel High Yield Bond ETF (Market Vectors ETF Trust ANGL), are stealing the bond ETF show.

As has been previously noted in this space, 2016 is the second consecutive year in which ANGL can be seen as the right place, right time junk bond ETF. Last year, ANGL benefited because its exposure to then controversial energy debt was well below that of traditional junk bond ETFs. This year, the fallen angels from the energy patch that have entered ANGL are making the ETF a juggernaut when it comes to performance and asset-gathering proficiency.

However, there are other reasons to consider an ETF like ANGL.

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“A less obvious source of value for fallen angels can arise when the underlying corporation engages in a bond buyback, typically in the form of a public tender. Bond buybacks are a form of 'liability management' that can help companies tidy up their balance sheets, improve their credit standings and ratings, and attract and retain investors. Companies use buybacks either to retire debt at a discount or to reduce costs simply by buying back a higher yielding bond and then issuing a new bond at a lower interest rate,” said VanEck in a recent note.

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ANGL, which has a 30-day SEC yield of just over 6 percent, allocates 47.1 percent of its weight to energy and materials issuers. Importantly, only 3.4 percent of the issues in ANGL are rated CCC, the problem area for junk bonds over the past year, particularly those issued by energy companies.

Last month, 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 $219.2 million.

“Companies recognize the value in buying back bonds for a variety of reasons; for investors it signals both the companies' willingness and ability to meet their debt obligations. For fallen angels, bond buybacks have served as another source of value so far this year. We believe bond buybacks offer another compelling reason for investors to look at the potential of this asset class,” added VanEck.