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Fallen Angel ETF top performer over first quarter


Morningstar data shows VanEck’s Market Vectors Fallen Angel High Yield Bond ETF, which seeks to track the BoA Merrill Lynch US Fallen Angel High Yield Index (H0FA), finished the first quarter of 2016 as the top performing ETF in the high yield fixed income category. 

ANGL returned 7.39 per cent to March 31, 2016, against the broad high yield bond market, as represented by the BofA Merrill Lynch US High Yield Index (H0A0), which returned 3.25 per cent.
“Much of ANGL’s positive performance came from increased exposure to the energy space,” says Fran Rodilosso, Portfolio Manager for Fixed Income ETFs with VanEck.
ANGL’s energy allocation increased from approximately 13 per cent to 25 per cent since the start of the year. “ANGL presents investors with a contrarian investment approach, as it tends to increase weights in sectors as they are still under ratings pressure,” Rodilosso says. “One of the reasons fallen angel high yield bonds have performed well in the past is that the bonds have tended to come into the H0FA index already pricing in a high degree of risk.” 
Fallen angels provide investors with a value proposition, the firm says, as fallen angels tend to be oversold prior to their downgrades.  Rodilosso says: “As the energy sector struggled in 2015, more companies saw their debt marked for potential downgrade. As those downgrades took place, ANGL’s exposure to energy began to tick up, and as oil prices recovered since mid-February ANGL and its underlying index were well positioned to participate in the upside, especially from fallen angels that had experienced forced selling as they moved out of the investment grade universe.”
Rodilosso concludes: “The recent distaste for bonds in the energy sector may resemble that of bonds issued by banks in the wake of the global financial crisis.  The banking sector ended up driving positive returns of fallen angels for several years, as the category performed better than the broad high yield bond market,” says Rodilosso. “As sectors move out of and back into favour, fallen angel high yield bonds can offer investors access to both opportunities for short-term tactical exposures and compelling long-term holdings in a broader fixed income portfolio.”

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