Fallen angels – bonds from downgraded companies – offer new opportunities.
Downgrading of company ratings often causes share price losses. But that in turn translates into new opportunities. And this is the principle of fallen angels: issuers who had an investment grade rating at issue of a bond but lost it during the term – in other words, they fell.
Fallen angels are frequently punished – at least temporarily – as their risk profiles no longer meet the needs of many institutional investors. Attention shifts back to what were once solid companies once they are downgraded, because the potential short-term price distortion can be a boost for the portfolio. This strategy has historically outperformed the global high yield market in both absolute and risk-adjusted terms. On average, fallen angels reach their lowest valuation approximately six months after the rating downgrade, at which point the recovery phase often begins, resulting in a return to the original rating. “This enables investors to profit from temporary price distortions and the resulting return in the recovery phase,” said Philipp Schlegel, responsible for developing international business activities at VanEck.
VanEck ETF on fallen angels
ETFs offer broad diversification and have been advancing for years now. The volume has steadily increased since their introduction. For instance, the volume of ETF assets under management worldwide is now some $5 trillion, having only broken the trillion-dollar barrier in 2009. This also brings fixed-income products to investors’ attention. “If you want to invest in bonds successfully, you need a good strategy, especially when interest rates are low and liquidity is excessive,” said Schlegel.
Investors wishing to add high-yield bonds to their portfolios should consider the VanEck Vectors™ Global Fallen Angel High Yield Bond UCITS ETF, which enables them to benefit from temporary price distortions as a result of credit rating downgrades. The ETF is based on the ICE BofAML Global Fallen Angel High Yield Index (HWFA) that tracks corporate bonds issued with an investment-grade rating, but which have since been downgraded to non-investment grade.
What are VanEck’s criteria?
In order to be included in the index, the bond must have a minimum term of 18 months. The minimum remaining term at the point of inclusion must be 12 months. In addition, the minimum issue size is $250 million/€250 million or £100 million/$100 million.
“The fallen angels investment concept is based on empirically provable patterns of corporate bond behaviour in rating downgrades. The concept has historically outperformed the global high yield market in both absolute and risk-adjusted terms,” said Schlegel.
The VanEck Vectors™ Global Fallen Angel High Yield Bond UCITS ETF is the first UCITS-compliant ETF to realise the fallen angels investment concept with a global investment horizon without excluding individual regions or countries.
Important Disclosures: VanEck Vectors™ Global Fallen Angel High Yield Bond UCITS ETF is a sub-fund of VanEck Vectors® UCITS ETFs plc., organised under the laws of Ireland. VanEck only serves professional clients in countries where the funds are registered or where funds can be sold in accordance with local private placement rules. Any investment decision must be made on the basis of the prospectus and the key investor information document (“KIID”), which is available at www.vaneck.com and VanEck Investments Limited at its registered office at 25-28 North Wall Quay, Dublin 1, Ireland. ICE Data Indices, LLC and its affiliates (“ICE Data”) indices and related information, the name “ICE Data”, and related trademarks, are intellectual property licensed from ICE Data, and may not be copied, used, or distributed without ICE Data’s prior written approval. The Fund have not been passed on as to its legality or suitability, and is not regulated, issued, endorsed, sold, guaranteed, or promoted by ICE Data. ICE DATA MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MER-CHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE INDICES, INDICES VALUES OR ANY DATA INCLUDED THEREIN. IN NO EVENT SHALL ICE DATA HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, DIRECT, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
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