Fallen Angel ETF Endures Oil Market Calamity

Oil is one of this year's worst-performing commodities, a theme that has a tendency to pressure high-yield corporate bonds because the U.S. junk bond market is littered with issues from energy companies. However, the VanEck Vectors Fallen Angel High Yield Bond ETF ANGL has been mostly steady this year with a gain of 2.5 percent.

ANGL's durability in the face of volatile oil markets is not new. When oil slumped several years ago, traditional junk bond ETFs languished due to heavy exposure to speculative CCC-rated from exploration and production firms. During that period, ANGL lacked energy exposure, enabling it to weather the storm. But as more energy producers were downgraded to junk credit ratings, ANGL's exposure to energy debt increased, allowing the ETF to benefit as oil prices recovered.

ANGL turned five years old in April and tracks the BofA Merrill Lynch US Fallen Angel High Yield Index (H0FA), “which is comprised of below investment grade corporate bonds denominated in U.S. dollars, issued in the U.S. domestic market and that were rated investment grade at the time of issuance,” according to VanEck.

Keeping An Eye On Spreads

Helped by low default rates, buoyant equity markets and the Federal Reserve's measured approach to raising interest rates, junk bond credit spreads are narrowing this year. Additionally, the fallen angel market is dwindling in size.

“Since last year, when commodity prices rebounded from the February 2016 lows, the fallen angel market size has diminished from what we view as credit-positive activity related to the extended spread tightening environment,” said VanEck in a recent note. “While the universe is smaller than a year ago, and could further decrease should credit spread tightening persist, the market size is currently within its historical range. As such, we believe fallen angels continue to present a viable option for income investors who may want to consider a higher quality concentration when allocating to high yield bonds.”

ANGL holds 234 fallen angel bonds and has a 30-day SEC yield of 4.91 percent.

Continuing To Outperform

"Fallen angels have outperformed the broad high yield bond market by 66 bps (5.62% versus. 4.96%) year to date, primarily attributable to their sector overweights in telecommunications, banking, and technology,” said VanEck. “These sector differences are driven by fallen angel universe migration, which occurs mainly from credit cycles impacting sectors and individual issuers, as seen more acutely last year with the influx of energy and basic industry sector entrants.”

ANGL has outperformed the largest junk bond ETF every year since it came to market.