Catching Falling Stars: The ANGL ETF Opportunity🌠

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Happy Thursday, ETF UNO readers! Today, we’re delving into an intriguing segment of the fixed-income market that could be a valuable addition to your portfolio. Let’s explore high-yield bonds with a unique twist: the VanEck Fallen Angel High Yield Bond ETF (ANGL). Suppose you’ve been curious about how to benefit from corporate turmoil (without the sensational headlines). In that case, this ETF might be just what you’re looking for.

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What is ANGL?

ANGL targets "fallen angels"—bonds that were once investment-grade but have been downgraded to junk status due to issuer issues. Despite this downgrade, these bonds can offer attractive investment opportunities. They must meet the following criteria:

• Rated as investment-grade at the time of issuance

• Currently rated as high-yield

• Have a minimum outstanding face value

• Meet specific maturity and liquidity requirements

Fallen angels are important because when investment-grade bonds are downgraded to high-yield status, institutional investors forced to sell them can drive prices below their true value. This creates opportunities for savvy investors to buy quality assets at a discount.

High-yield bonds carry default risk (issuers may fail to repay debt), interest rate sensitivity (prices fall as rates rise), and liquidity risk (harder to sell in a panic). Yet, they offer compelling perks:

• 🤑Higher Income: Yields often dwarf those of Treasuries or investment-grade corporates.

• 📈Capital Appreciation Potential: If a company rebounds, its bonds could regain investment-grade status ("rising angels"), boosting prices.

Investment Strategy📊

ANGL rebalances monthly to ensure a consistent flow of new opportunities. ETF investors should consider these strategies for incorporating ANGL into their portfolios:

• 🛰️Core-Satellite Approach: Use ANGL as a satellite position (5-15%) alongside your core bond holdings. This strategy lets you maintain your primary fixed-income exposure while adding potential alpha through fallen angels.

• ↗️Yield Enhancement Strategy: Allocate a portion of your traditional high-yield exposure to ANGL. This allocation provides exposure to higher-quality, high-yield bonds with improvement potential.

• 🌊Tactical Opportunity Play: Increase allocation during periods of market stress when downgrades typically accelerate and Reduce exposure during strong economic periods when upgrades are more common.

ANGL at a glance

ETF Issuer: VanEck

Inception: 2012-04-10

Asset Class: Fixed-Income

Underlying Index: ICE US Fallen Angel High Yield 10% Constrained Index

Geographical Focus: U.S.

Expense Ratio: 0.25% (as of last data point)

Dividend Yield: 6.25% (as of last data point)

Distribution Frequency: Monthly

Historical Performance

The ANGL ETF has demonstrated interesting performance characteristics since its inception in 2012:

• Competitive yields compared to traditional high-yield bond ETFs

• Historical outperformance during recovery periods following market stress

• Lower default rates compared to the broader high-yield market

• Potential for capital appreciation through "rising stars" (bonds returning to investment grade)

Dring a market downturn, the ETF experiences significant pressure but delivers strong returns during recovery. This pattern has also been observed in several credit cycles, highlighting the potential opportunity in market dislocations.

ETF Radar View

The radar chart below shows the general characteristics of the ETF:

Top 3 Reasons to Invest

1. Quality Bias with Value Opportunity: These bonds typically have stronger fundamental characteristics than original-issue high-yield bonds. They often come from larger, more established issuers with longer operating histories and stronger balance sheets. The forced selling during downgrades frequently creates pricing inefficiencies that patient investors can exploit.

2. Natural Recovery Potential: Fallen angels have historically shown higher rates of returning to investment grade compared to original-issue high-yield bonds. This "rising star" potential provides additional potential returns beyond yield income.

3. Systematic Approach to Market Inefficiency: The ETF's rules-based methodology exposes the fallen angel opportunity systematically while maintaining transparency and liquidity. This approach removes emotional decision-making and ensures consistent exposure to the strategy. The ETF structure offers intraday liquidity and typically lower transaction costs compared to individual bond investing.

Top 3 Reasons Not to Invest

1. Credit Risk Exposure: Despite their investment-grade heritage, fallen angels are still high-yield bonds with significant credit risk. During economic downturns or periods of market stress, these bonds can experience substantial price volatility and potential defaults.

2. Interest Rate Sensitivity: ANGL is subject to interest rate risk like all bond investments. The fund's duration (a measure of interest rate sensitivity) can be significant, meaning that rising interest rates could negatively impact returns. This risk may be particularly relevant in the current market environment, where interest rate uncertainty remains elevated.

3. Limited Universe: The fallen angel market is relatively small compared to the broader high-yield market. This limitation can impact liquidity and lead to higher transaction costs during periods of market stress. Additionally, the limited universe means the fund may have concentrated positions in certain issuers or sectors, potentially increasing specific risks.

ANGL: Fallen Angels Rising👼

The VanEck Fallen Angel High Yield Bond ETF offers investors a unique opportunity in high-yield fixed-income investing, providing:

• Exposure to potentially undervalued bonds from reputable issuers

• Higher yield potential than investment-grade bonds

• Diversification benefits for fixed-income portfolios

• Access to a recognised market inefficiency

Success with ANGL requires:

• An understanding of high-yield bond risks

• Patience through market fluctuations

• A long-term investment outlook

For those who accept these risks, ANGL can be a valuable addition to a diversified investment strategy.

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DISCLAIMER: This article is for informational purposes only and should not be considered as investment advice. Always conduct your own research and consult with a financial advisor before making investment decisions.