Performance Helped by Higher Credit Quality and Lower Energy Exposure
Fallen angels, corporate high yield bonds that were originally issued with investment grade credit ratings, proved resilient in 2015.
Generally characterized by higher average credit quality than the broad high yield bond market, fallen angels outperformed by 1.39%, as measured by the BofA Merrill Lynch US Fallen Angel High Yield Index (-3.23%) versus the BofA Merrill Lynch US High Yield Index (-4.62%). Higher average credit quality, lower average exposure to the energy sector, and higher average credit quality within the energy sector were main factors that helped fallen angels end the year ahead of the broad high yield bond market.
Less Weight in Exploration & Production
While the energy sector allocation among fallen angels increased in 2015 (from 4.3% to 13.3%) as the broad high yield bond market's decreased (from 13.4% to 10.9%), it was fallen angels' significantly lower yearend industry weight in exploration and production (E&P) that primarily contributed to outperformance. At 0.48%, fallen angels were less exposed to E&P than the broad high yield bond market, which ended 2015 with 4.89% in E&P, arguably one of the energy sector's more vulnerable industries to the oil price collapse.
Declining oil and commodity prices had a greater relative impact on fallen angels' Q4 2015 performance, as fallen angels underperformed the broad high yield bond market by 74 basis points. While the energy sector grew from fallen angel entrants throughout 2015, none were E&P bonds. Furthermore, the fallen angel universe maintained its higher average credit quality, ending 2015 with 81.6% in BB-rated (below investment grade) bonds versus the broad high yield bond market's 48.4%.
Sector Biases Drove Fallen Angel Performance in 2015
The main drivers of fallen angels' performance relative to the broad high yield bond market remained consistent throughout Q4 and 2015. Based on average sector weights:
- Energy (underweight)
- Banking (overweight)
- Financial Services (overweight)
- Basic Industry (overweight)
- Healthcare (underweight)
- Media (underweight)
Sector Return Attribution (%):
Fallen Angels Relative to the Broad High Yield Bond Market
While fallen angels had lower average energy exposure in 2015, two more energy sector fallen angels entered the index in January, increasing the allocation to 14.3% versus the broad high yield bond market’s 10.3%, as of January 31, 2016.
Source: FactSet. Data as of December 31, 2015. Past performance is no guarantee of future performance. Top and bottom five sector attribution of the BofA Merrill Lynch US Fallen Angel High Yield Index for fallen angels versus the BofA Merrill Lynch US High Yield Index for the broad high yield bond market. Figures are gross of fees, non-transaction based and therefore estimates only. Past performance is not indicative of future results. Attribution represents the opportunity cost of investment positions in a group relative to the overall benchmark.
Learn More About the Market Vectors Fallen Angel Bond ETF (ANGL)
Index performance is not illustrative of fund performance. Fund performance current to the most recent month end is available by visiting vaneck.com. Historical performance is not indicative of future results; current data may differ from data quoted. Indexes are unmanaged and are not securities in which an investment can be made.
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BofA Merill Lynch US Fallen Angel High Yield Index (H0FA) is a subset of the BofA Merrill Lynch US High Yield Index (H0A0), including securities that were rated investment grade at time of issuance.
BofA Merill Lynch US High Yield Index (HOAO) is comprised of below-investment grade corporate bonds (based on an average of Moody's, S&P, and Fitch) denominated in U.S. dollars. The country of risk of qualifying issuers must be an FX-G10 member, a Western European nation, or a territory of the U.S. or a Western European nation.
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Performance and characteristics of the BofA Merrill Lynch US Fallen Angel High Yield Index (H0FA) are quoted throughout this material. H0FA is representative of the entire fallen angels high yield corporate bond market. H0FA does not represent the performance or yield of the Market Vectors Fallen Angel High Yield Bond Fund.
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An investment in the Fund may be subject to risk which include, among others, credit risk, call risk, and interest rate risk, all of which may adversely affect the Fund. High yield bonds may be subject to greater risk of loss of income and principal and are likely to be more sensitive to adverse economic changes than higher rated securities. International investing involves additional risks which include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability. The Fund's assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.
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