ANGL: Fantastic Fallen Angel ETF, Outstanding Performance, Average 5.4% Yield

Fallen angels have significantly outperformed broader bonds and high-yield bond benchmarks for decades, as has the VanEck Fallen Angel High Yield Bond ETF (NASDAQ:ANGL). I last covered ANGL in mid-2023. In that article, I argued that the iShares Fallen Angels USD Bond ETF (NASDAQ:FALN) was a slightly superior investment, due to FALN’s lower expenses and higher yield. Since then, ANGL’s expenses have gone down to 0.25%, yields rose to 5.4%, with both figures matching those of FALN. As such, I now believe that both funds have similar fundamentals and value propositions. Both are buys, due to their proven strategies and strong performance track-records.

Fallen Angel Overview And Analysis

ANGL invests in fallen angels, a very specific type of bond. To understand ANGL we must understand these securities, and how they relate to the broader corporate bond market.

Corporate bonds can be divided into two segments. Investment-grade bonds, those issued by companies with strong balance sheets and low default rates. Non-investment grade bonds, those issued by companies with weaker balance sheets and higher default rates, especially during downturns and recessions.

Some institutional investors and index funds are constrained from investing in non-investment grade bonds, due to their high default rates, and so focus on investment-grade bonds. As an example, the Vanguard Total Bond Market Index Fund ETF Shares (NASDAQ: BND), the largest bond ETF in the market, exclusively invests in investment-grade bonds.

Corollary of the above is that some institutional investors are forced sellers of bonds downgraded from investment-grade to non-investment grade, i.e. fallen angels. As an example, if a bond held by BND were to be downgraded to BB, the fund would be forced to sell said bond. Forced selling would lead to lower bond prices and higher yields. Importantly, the magnitude of these changes would almost certainly be very high, there are lots of institutional investors and lots of forced selling, and hence out of line with fundamentals.

Investors can take advantage of the above by buying fallen angels. Doing so means buying heavily discounted bonds with above-average yields for their level of risk. Doing so should also lead to above-average returns, as conditions stabilize and prices recover. Fallen angels have outperformed most other high-yield bonds for decades, and by very wide margins.

Risk-adjusted returns have been quite strong too, less so in the more recent past.

With the above in mind, let’s have a closer look at ANGL.

ANGL – Overview and Analysis

Strategy and Holdings

ANGL is an index ETF investing in fallen angel, tracking the ICE US Fallen Angel High Yield 10% Constrained Index. It is a surprisingly diversified fund, with investments in 145 securities from most relevant industry sectors.

Concentration is higher than average, with the fund’s top ten issuers accounting for over 40% of its portfolio. Issuers are capped at 10.0%, although there are only three with allocations higher than 5.0%.

ANGL seems reasonably well-diversified for a fallen angel ETF. As the fund focuses on a specific segment of high-yield corporate bonds, diversification is much lower than average. Investors could consider pairing the fund with others focusing on different assets, although I’m quite bullish on ANGL regardless.

ANGL focuses on non-investment grade bonds but holds a surprisingly large 14.6% position in investment-grade securities. These are almost certainly recently upgraded bonds, and should be sold in the coming weeks / months.

ANGL’s investment-grade bonds almost certainly led to sizable gains in the recent past. This is because upgraded bonds tend to rise in price, as higher credit quality leads to increased investor demand. ANGL should sell these bonds soon, effectively locking-in gains. This is a somewhat common occurrence for the fund, as fallen angels are only slightly riskier than investment-grade bonds (remember they were investment-grade originally).

For what it’s worth, ANGL has outperformed YTD, broadly in-line with expectations. Returns have been quite similar to those of high-yield corporate bond benchmarks though, although it does depend on the specific time period in question.

Finally, ANGL’s duration of 5.4 years is slightly below the bond average, but moderately higher than the high-yield bond average. Figures are broadly consistent for the fund’s credit quality / holdings.

Due to the above, ANGL should outperform most bonds when rates increase, underperform when rates decrease. Opposite is true relative to high-yield corporate bonds specifically. As an example, a quick look at the fund’s performance since early 2022, when the Fed started to hike rates.

Other factors impact the fund’s performance, which brings me to my next point.

Performance Track-Record

ANGL’s performance track-record is strong, with the fund outperforming most bonds and bond sub-asset classes since inception, and by healthy margins.

Looking at specific time periods, it seems the fund’s outperformance is reasonably consistent, although much weaker since the Fed started to hike.

ANGL’s outperformance was entirely due to fallen angels themselves outperforming, due to the aforementioned issues with forced selling. In simple terms, fallen angels outperform, as do fallen angel ETFs. As the fund’s performance and returns were driven by structural market issues, outperformance is set to continue, in my opinion at least.

Dividend Analysis

ANGL currently sports a 5.4% yield, higher than the bond average, but lower than the high-yield bond average.

ANGL’s dividend yield does not take into consideration potential capital gains from the fund’s holdings maturing at par. Taking these into consideration, potential returns / yield to maturities rise to 6.8%, a bit higher than the above.

At the same time, the figures above do not take into consideration potential gains from buying fallen angels at fire sale prices, nor from these recovering in price soon after.

Overall, ANGL’s dividend yield is somewhere between OK and good, but it is definitely not the fund’s key benefit or characteristic. Its investment strategy and performance are. Lots of high-yield ETFs have higher yields than ANGL, extremely few have comparable / higher returns.

Conclusion

ANGL’s proven strategy, outperformance, and good 5.4% dividend yield make the fund a buy.