High-Yield Bond ETF Showdown: ANGL Vs. QLTB

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Includes: ANGL, QLTB
by: Zacks Investment Research

High-yield bond ETFs have gained immense popularity of late thanks to uncertainty in the broad equity markets, as well as low yields from traditional bonds like U.S. Treasury securities. Lately, investors have been taking a closer look at the high-yield bond market as a great way to obtain high levels of income with low amounts of correlation to broad equity markets at the same time.

High-Yield Bond Explained

High-yield bonds have lower credit rating (also called below-investment grade bonds) than investment-grade corporate bonds, treasury bonds, and top-notch municipal bonds (read: "Should Retail Investors Invest In Treasury Bonds?"). These fixed-income securities are generally rated below "BBB" from S&P and below "Baa" from Moody. Despite the ultra-low-yield environment, these bonds pay higher amounts out to investors, largely due to a greater risk of default.

The default rates are sometimes higher than what investors may see in their safer counterparts, a situation that can result in lower returns. In addition, these bonds are vulnerable to the economic downturn and rising interest rate environment, although rates are expected to remain low for at least the foreseeable future. Furthermore, default rates would rise but at a modest pace, suggesting investors to enjoy benefits from the current market expectations.

There are about 23 ETFs in the space, each having a different aspect, nature and performance and are by no means similar to each other. Let's take a detailed look on two of the newest funds in the space, launched in April this year, which both target a similar corner of the high-yield bond market:

Market Vectors Fallen Angel ETF (NYSEARCA:ANGL)

The fund seems to be an interesting choice for investors as it focuses on "fallen angel" bonds, which refers to corporate bonds that were once investment grade but have now been downgraded to high-yield, or junk, bonds (read: "Van Eck Launches Fallen Angel Bond ETF"). The product seeks to replicate the performance of the BofA Merrill Lynch U.S. Fallen Angel High Yield Index, holding 66 securities in the basket.

Bonds in the underlying index generally consist of BB and lower rated corporates, which together make up 95.28% of the assets. The index is weighted toward industrial bonds with 63% share, with the biggest allocation in this space going to telecom and basic industries. Financials and utilities make up the remaining portion of the index.

The ETF looks to pay well for the higher default risk as it yields about 6.42% based on average yield to worst, 6.65% on average yield to maturity, 6.56% on average coupon, and 6.23% on 30-day SEC yield. It has returned more than 5% since its inception, making it an interesting choice for investors looking for a new way to play higher quality junk bonds.

Since the fund does not have any limitation to maturity, its average maturity comes in at 11.75 years, which raises the risk of default. However, ANGL has a lower effective duration of 5.88 years, which limits the interest rate risk.

The fund is quite inexpensive as it charges 40 bps in fees per year from investors. However, it is less liquid and trades in a small volume of 14,000 shares per day on average, producing a wide bid/ask spread. The product has, so far, attracted about $10.3 million assets, suggesting the technique hasn’t really caught on yet from this perspective either.

iShares Baa-Ba Rated Corporate Bond Fund (BATS:QLTB)

With AUM of $10.2 million, this fund targets the U.S. corporate high- yield bond market by focusing on securities that have ratings of Baa1-Ba3. It seeks to match the performance of the Barclays Capital U.S. Corporate Baa-Ba Capped Index, holding 174 securities in the basket.

The product does not spread across a variety of sectors as it focuses mainly on the industrial sector, with 68% share, followed by financial institutions and utilities. The ETF can yield only 3.94% to average maturity, 5.92% average coupon rate, and 3.66% in terms of 30-day SEC yield.

Similar to ANGL, QLTB is prone to greater default risk with average maturity of 9.91 years and relatively higher interest risk with an effective duration of 6.46 years. The product also has a wide bid/ask spread thanks to paltry volumes of about 7,000 shares per day. However, the fund is quite cheap when compared to market vector counterparts, as it charges only 30 bps in annual fees from investors. Due to its low-yield nature, the ETF returned 200 bps lower than its counterpart since inception and yields roughly 3.66% in 30-day SEC yield terms.

The similarities and dissimilarities of these two funds can easily be assessable in the table provided below for investors seeking to target the high end of the junk bond market with either of these two relatively new products (see more ETFs in the Zacks ETF Center):

ANGL

QLTB

Inception Date

4/11/2012

4/26/2012

Index

BofA Merrill Lynch US Fallen Angel High Yield Index

Barclays Capital U.S. Corporate Baa - Ba Capped Index

AUM

$10.3 million

$10.2 million

No. of Holdings

66

174

Expense Ratio

0.40%

0.30%

Total Returns Since Inception

5.30%

3.10%

Dividend Yield

1.68%

1.00%

Average Yield to Maturity

6.65%

3.94%

30-Day SEC Yield

6.23%

3.66%

Modified Duration (in Years)

5.88

6.46

Average Maturity (in Years)

11.75

9.91

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