Van Eck Launches Fallen Angel Bond ETF (ANGL, JNK, HYG, PHB, IDXJ, FRAK)

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April 13, 2012 1:48pm NYSE:ANGL NYSE:HYG

Eric Dutram: Van Eck continues to be very active on the product development front as the New York City-based firm has launched several new products this year including an Indonesia Small Cap ETF (NYSEARCA:IDXJ) and a Market Vectors Unconventional Oil & Gas ETF (NYSEARCA:FRAK).

In continuing with these novel concepts, the firm has also just released the Market Vectors Fallen Angel ETF (NYSEARCA:ANGL) in the bond space.

This intriguing product intends to take a close look at a certain corner of the fixed income world, focusing in on ‘fallen angel’ bonds. These bonds consist of securities that were once investment grade but have fallen from grace and are now trading as junk bonds (see Top Three High Yield Junk Bond ETFs).

According to Van Eck’s research, these bonds tend to have lower default rates than their more traditional junk bond counterparts while they also tend to operate at the higher end of the junk bond credit quality spectrum as well.  

Furthermore, the underlying index of this product has outperformed both high yield corporate bonds and broader bond indexes over long time periods—last decade—suggesting that they could offer a better risk reward profile than other types of fixed income securities. Additionally, thanks to the higher credit quality of these bonds when compared to the broader junk markets, they tend to outperform during bear markets, such as in 2008.

Fallen Angel Bond ETF In Focus

In terms of the portfolio construction, the junk bond ETF has a heavy focus on industrial bonds, with the biggest allocations in this space going to telecom and basic industries. Beyond this, the financials segment accounts for roughly one-third of the total with the biggest chunk in this regard going to the broad banking industry.

For credit quality, over 90% of the underlying index has a rating of at least ‘B’ with nearly 70% coming in at a ‘BB’ rating. Furthermore, investors should note that the product has a portfolio that is well dispersed across maturity levels, although all bonds in the fund mature in 10 years or less, giving the index an average modified duration of about 5.5 years (see Are Investors Taking Another Look At Junk Bond ETFs?).

The ETF looks to pay out a yield of about 7.5%– based on average yield to worst—or about 6.8%– based on the average coupon—While this doesn’t compare favorable to many high yield bond ETFs, it should be noted that the net expense ratio of 40 basis points is roughly in line with most of the other competitors in the space.

While the focus may be a little too concentrated for some investors, the product could definitely see some inflows from those looking to make a safer play on the junk bond space. “Although they were downgraded from investment grade status, many Fallen Angel issuers still retain a capital structure similar to investment grade issuers, which may enable Fallen Angel issuers to enjoy greater financing flexibility than the original issue high yield issuers,” said Fran Rodilosso, Fixed Income Portfolio Manager at Van Eck in a press release (see Van Eck Launches International High Yield Bond ETF).

Fran continued, “Many Investors overlook Fallen Angels, but historical data shows that in six of the past nine years ending in 2011, the U.S. dollar denominated Fallen Angels, as represented by The BofA Merrill Lynch U.S. Fallen Angel High Yield Index, have outperforming general U.S. dollar denominated corporate high yield bonds, as represented by the Barclays Capital High Yield Very Liquid Index.”

High Yield Bond ETF Competition

Although there aren’t any other ETFs that specifically target the fallen angel bond market, there are plenty that focus in on high yield bonds in general. As a result, there are a decent number of competitors to ANGL in the high yield market, including a number of heavily entrenched competitors such as (NYSEARCA:HYG) and (NYSEARCA:JNK) which both have more than $11 billion in AUM (read Looking For Income? Try High Yield Muni ETFs).

Arguably, the closest competitor could be the PowerShares High Yield Corporate Bond Portfolio (NYSEARCA:PHB). The fund targets the RAFI High Yield Bond Index which looks to follow higher quality bonds in the junk segment, focusing on securities in the top part of the below investment grade category.

Currently, the product charges investors 50 basis points a year and pays out a 30 Day SEC Yield of about 4.8%. Despite being more expensive and paying a slightly lower yield, the junk bond ETF has seen incredible interest from investors, having amassed nearly $850 million in AUM while seeing trading volume in excess of half a million shares a day (see more at the Zacks ETF Center).

Given how popular PHB has been, even with its higher expense ratio, ANGL could be an interesting choice for those looking for an alternative in the space. ANGL looks to have a lower overall expense ratio, while its yield projects to be comparable, if not favorable, to PowerShares’ entrant in the space. As a result, investors could see decent inflows into this product, especially if markets remain weak and bond investing continues to intrigue investors looking for high levels of current income.

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Author holds a small position in PHB.

Written By Eric Dutram From Zacks Investment Research

In 1978, Len Zacks discovered the power of earnings estimates revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank, a peerless stock rating system whose Strong Buy recommendation has an average return of 26% per year.

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