High-yield bond ETFs have had a strong run in the past year, and some say they are going higher, while others warn of overextension. The outlook for the segment may be unclear, but the disparity in performance among some of the high-yield bond ETFs isn’t.
There’s one fund that seems to be in a class of its own, at least in the past few years. The VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL) is neither the oldest, the biggest, the most liquid or the most popular high-yield bond ETF.
For much of its life since it came to market almost five years ago, ANGL has been largely sitting quietly in the shadow of giants like the $16 billion iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the $12 billion SPDR Bloomberg Barclays High Yield Bond ETF (JNK).
But all of that seems to be changing as ANGL’s performance stands out in a crowded segment of high-yield ETFs. In the past 12 months alone, investors have poured more than $550 million into ANGL, helping push the fund to about $715 million in assets under management today.
Look at how ANGL has performed relative to HYG and JNK in the past three years:
Chart courtesy of StockCharts.com
Pretty Simple Secret Sauce
That outperformance hinges on a secret sauce that’s really no secret. ANGL buys high-quality junk bonds, if you will—those that were originally issued as investment grade, but have just been downgraded to high yield. These bonds, as they drop into the junk bucket, are heavily oversold as investors (primarily institutional) dump them into the market to meet their mandates.
Because of that oversold nature, these bonds are poised to jump higher almost immediately when they are added to the portfolio. It’s an extra juice ANGL extracts from the market really well.
As Dave Nadig, CEO of ETF.com, recently put it, ANGL is “exploiting what is actually broken in the bond market.”
The way it all works is that investors own bonds at “different tranche levels,” he said. As soon as a downgrade takes place, these investors have to get out of those positions, pushing these bonds into oversold territory. That’s a “structural flaw,” he noted, and the key source of ANGL’s success.