Outperforming ‘Fallen Angel’ Bond ETFs Further Energized

Rebounding corporate energy bonds powering these ETFs.

New York (Reuters) – The top-performing high-yield bond exchange-traded fund is betting big that energy companies will not be deadbeats.

The $212 million VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL | B-51) is winning its category this year by focusing almost exclusively on particular low-rated bonds: so-called fallen angels, or downgraded bonds that used to be investment grade but have since fallen from grace.

The fund, which is outperforming the largest broad high-yield debt competitor over three years as well, was able to sidestep the rout in oil and gas company debt that accompanied the 74% drop in crude prices between June 2014 and Feb. 11, when oil bottomed out at $26.05 a barrel.

During that long oil price slide, ANGL lost 8.2%, while the iShares iBoxx $ High Yield Corporate Bond ETF (HYG | B-68) dropped 13.2%.

Now with energy companies dominating the fallen angels list, ANGL is betting more on that sector than HYG or most other broad high-yield (also called junk bond) competitors. ANGL's 25% energy exposure is more than double HYG’s 12% weighting.

Chart courtesy of StockCharts.com

‘Recovery Trade’

"It's a recovery trade," said Matthew Tucker, head of iShares Americas fixed-income strategy at BlackRock, which launched its own fallen angels ETF on June 16. The iShares Fallen Angels USD Bond ETF (FALN) has a 28% energy weighting.

Oil's rebound this year—U.S. crude traded above $45 on Thursday—has already helped energy debt. ANGL has leapt 21% since Feb. 11. It is up 17.23% so far this year.

Yet it is not a risk-free trade. The oil-price rebound has not cured the energy sector's problems. Fitch Ratings pegs the 12-month U.S. high-yield energy default rate at 15% in June, and expects the number to rise to 20% this year.

ANGL Interest-Rate Sensitive

Furthermore, the ANGL fund is more interest-rate-sensitive than its competitors. Should rates rise by 1%, it could drive a 5% decline for ANGL, according to data service FactSet Research Systems.

Likewise, ANGL's bonds—higher grade than HYG's—are more likely to lose value if spreads between U.S. Treasurys and junk bond yields widen, FactSet statistics showed.

The reverse is true—the bonds could rocket up more in favorable markets. If rising rates signal an improving economy, it will be easier for energy firms to repay debts, VanEck portfolio manager Fran Rodilosso says.