“Fallen Angel” is a jargon for bonds that have been downgraded from investment grade.
Fallen angels, on average, have historically outperformed the broad high yield corporates market.1
1When comparing ICE BofAML Global Fallen Angel High Yield Index and ICE BofAML Global High Yield Index over 3, 5 and 10 year periods. Parameters taken into consideration are credit quality, total return and annualised return. Past performance is not indicative of future results. Data starting at 31 December 2004.
Institutional investors are often restricted by mandates that allow investments in the Investment-Grade Bonds only. Consequently, in case credit rating agencies downgrade a bond from investment grade, the bond price will fall by more than warranted by its fundamentals, as institutional investors will be forced to sell off such securities en masse.
Judged by the bond market’s standard yardsticks, Fallen Angels have had lower default rates and roughly equal recovery rates compared to the general High Yield universe1.
Fallen Angels have been historically more likely to be upgraded back to investment grade, thereby becoming “Rising Stars”, which would make them available again for managers with investment grade mandates, warranting a price increase. This is an interesting element that could provide additional upside potential to our Fallen Angels ETF.
Currently, there is a particular opportunity to invest, as the number of fallen angels grew significantly during the pandemic. As at any time of economic distress, a number of well-known companies’ bonds were downgraded. The global economy has been slowly picking up its pace since the heyday of the pandemic, however the number of Fallen Angels still has not returned to the pre-pandemic levels.
At 0.4% total expense ratio, the VanEck Global Fallen Angel High Yield Bond UCITS ETF is currently the cheapest Fallen Angels ETF in Europe.
Because all or a portion of a Fallen Angels ETF are being invested in securities denominated in foreign currencies, the Fund’s exposure to foreign currencies and changes in the value of foreign currencies versus the base currency may result in reduced returns for the Fund, and the value of certain foreign currencies may be subject to a high degree of fluctuation. This is one of the factors to consider before investing in a Fallen Angels ETF.
Investments in emerging market countries are subject to specific risks and securities are generally less liquid and less efficient and securities markets may be less well regulated. Specific risks may be heightened by currency fluctuations and exchange control; imposition of restrictions on the repatriation of funds or other assets; governmental interference; higher inflation; social, economic and political uncertainties. That is another risk factor to take into account when investing in a Fallen Angels ETF.
The prices of junk bonds are likely to be more sensitive to adverse economic changes or individual issuer developments than higher rated securities possibly leading to junk bond issuers not being able to service their principal and interest payment obligations. The secondary market for securities that are junk bonds may be less liquid than the markets for higher quality securities. Thus, it is worth taking into account this risk factor before investing in a Fallen Angels ETF.
For more information on risks, please see the “Risk Factors” section of the relevant Fund’s prospectus, available on www.vaneck.com.