Van Eck Debuts Fallen-Angel Bond ETF

April 11, 2012

Van Eck rolls out a junk bond ETF that may not be junk forever.

Van Eck Global, the New York-based fund sponsor behind the Market Vectors ETFs, today rolled out a high-yield bond ETF focused on corporate bonds that weren’t junk debt at the outset, but that were downgraded somewhere along the line.

The Market Vectors Fallen Angel High Yield Bond ETF (NYSEArca: ANGL) will track a BofA Merrill Lynch index comprising dollar-denominated junk corporate bonds that were rated investment grade at time of issuance. The fund has a net expense ratio of 0.40 percent, which is capped through Sept. 1, 2013.

ANGL serves up exposure to what still is a largely unexplored segment of the corporate bond market, but one that represents as much as 15 percent of the dollar-denominated high-yield bond universe, according to data provided by Van Eck. Many of the issuers have stronger debt profiles than pure high-yield issuers.

The fund is Van Eck’s second junk bond ETF launched this month alone in what seems to be a race by fund providers to cater to investors’ enormous appetite for income-generating strategies at a time of ultra-low interest rates.

Van Eck rolled out the Market Vectors International High Yield Bond ETF (NYSEArca: IHY) earlier this month that canvasses the globe for junk debt in another strategy that goes off the beaten path to search for yield.

What’s unique about “fallen angel” bonds is that they tend to be concentrated at the higher end of the credit-rating spectrum, and are thus more likely to be upgraded than other junk bonds of similar credit that were deemed high yield at issuance.

For investors, those traits translate into a high-yield bond portfolio that’s tied to some of the best-known corporate names in the market in a mix that has historically outperformed a traditional high-yield bond portfolio, Van Eck said in a press release.

In six out of the past nine years, the BofA Merrill Lynch U.S. Fallen Angel High Yield Index—a basket of fallen-angel bonds—outperformed the Barclays Capital High Yield Very Liquid Index, comprising dollar-denominated corporate high-yield bonds, Van Eck’s fixed-income portfolio manager Fran Rodilosso said in the release.

“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 original- issue, high-yield issuers,” Rodilosso said.

Portfolio Traits

ANGL’s top holdings include bonds from Ford Motor Credit Co., Springleaf Finance Corp., Citigroup, Embarq Corp. and Ford Motor Co.

The portfolio’s average yield-to-worst—or the lowest possible yield investors can expect to get—is 7.48 percent, Van Eck data showed.

The index underlying the fund has an average maturity of roughly 10 years in a mix that allocates some 72 percent of the basket to “BB”-rated bonds.

As far as sector exposure, industrials represent nearly two-thirds of the portfolio, with financials snagging 33 percent of the mix.

ANGL anticipates paying dividends on a monthly basis, while capital gains, if any, should be seen once a year.

 

 

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