ANGL Provides Best Exposure To Junk Bonds In The ETF Universe

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About: VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL)
by: Retired Investor
Summary

ANGL invest in bonds that were investment grade when issued but no longer are based on the BofA Merrill Lynch U.S. Fallen Angel High Yield Index.

There are at least four other ETFs mirroring this strategy for "fallen angel," but others are new and very small in size.

ANGL has out performed the other major junk bond ETFs and until the past year, the top investment-grade corporate bond fund; I consider it a buy.

Bonds can start life as junk-rated (Below BBB) or due to economic hardships, get downgraded by the rating agencies into junk status. The underlying theory of this ETF is simple: Bonds that were better than junk once have a greater chance of becoming non-junk than bonds that started out as junk. Since bond prices tend to raise as their rating improves, Vaneck Vectors Fallen Angel High Yield ETF (ANGL) looks to capture those price appreciations. Based on their seven-year returns, this appears to be happening.

Source: Bloomberg 6/6/19

What is ANGL all about?

Source: Fidelity.com

ANGL is by far the largest in size and easiest to trade without getting hurt by the bid/ask spread. While the average maturity is nearly twice the category's, the more important duration almost matches. Based on the yield difference, not sure how Fidelity defined the Asset Class used.

Source: Bloomberg

ANGL holds 277 bonds across 91 issuers. The number of issuers is the critical number since most likely all bonds from the same issuer will go bankrupt or be upgraded at the same time. I took the holdings and rolled them into the respective issuers. Data was divided into three segments and I am listing the top holdings in each category.

Agency Bonds (67 bonds - 2 issuers)

Federal Farm Credit Bank

0.19%

Federal Home Loan Bank

0.52%

Financials (31 bonds - 17 issuers)

Deutche Bank AG

2.50%

Genworth Financial

2.14%

Intesa Sanpaolo Spa

1.78%

Royal Bank Scotland

1.37%

Goldman Sachs

1.35%

CommerzBank AG

1.21%

Lloyds of London

1.08%

Industrials (179 bonds - 72 issuers)

Freeport-McMoRan

6.93%

Sears

4.51%

Arconic

4.24%

Dell Tech

3.97%

Teleom Italia

3.69%

Xerox

3.59%

CenturyLink

3.21%

DCP Midstream

2.69%

CF Industries

2.54%

There are 33 issuers with at least 1% weight in ANGL and these represent 70% of the assets held by the ETF. Major Foreign banks make up the bulk of the financials bonds. Energy, Communications, and Airlines the bulk of the industrial bonds. While all four have been doing much better since 2008, naturally, all companies are at different places in their recovery. Your opinion of those four market segments would influence your decision on buying ANGL or most junk bond funds.

With over 23% in the top five industrial issuers, that is where the bulk of the risk (and potential benefits) lies. There are some big unknowns in the top two holdings. Freeport-McMoRan (FCX) is dependent on two things: copper and Asia. Both would suffer in a slowing economy and an elongated trade war with China would be bad. Sears: what happens as they come out of bankruptcy and will the CEO treat it any better than in the past?

BB Indx Comp Rating

5-7

7-10

10-20

20-30

30+

AAA

2.34

2.59

3.21

3.42

3.59

AA+

2.57

2.79

3.42

3.68

3.75

AA

2.53

2.7

3.3

3.57

3.79

AA-

2.55

2.91

3.35

3.63

3.8

A+

2.57

2.81

3.56

3.67

3.73

A

2.73

2.95

3.61

3.78

4.02

A-

2.84

3.14

3.79

3.96

4.07

BBB+

2.99

3.28

4.05

4.25

4.3

BBB

3.26

3.65

4.42

4.71

5.19

BBB-

3.64

4.04

5.08

5.17

6.03

Source: Bloomberg

In buying a junk bond fund, one of the questions you should ask is, "I am getting compensated for the extra risk?". The above chart shows current yields by rating and years-to-maturity. I compared the weighted average coupon on ANGL and CORP, an investment grade corporate bond ETF, and ANGL is giving you a 1.51% yield "bonus" for the extra risk. Both ETFs have about the same weighted average maturity, so the two yields should be comparable.

I found this chart interesting. It appears ANGL performs much better in January-May time period. Open to ideas as to why that would be.

Source: Bloomberg 6/6/19

Conclusion

I use ANGL for my high-yield corporate bond exposure. I think there is merit in the concept of which bonds will move up from junk bond status. I believe the extra 1.5% yield adequately compensates me for the extra risk versus an investment-grade corporate bond fund. In reviewing performance of ANGL against the two premier junk bond ETFs, it has returned an average of 7.6% over the last seven years versus only about 4.5% for either JNK or HYG.

With the weighted average duration close to four years, there is limited time for bonds to default, but enough time for companies to get at least a small improvement in their bond rating. A one-step rating improvement could mean a 9% price jump per bond - not bad! If a slowing economy doesn't concern you too much about an increase in defaults, ANGL would be my choice among the junk-bond ETFs.

Disclosure: I am/we are long ANGL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.