Fallen Angel ETF Still Angelic As Oil Prices Slump

Oil prices are slumping again, sending exchange traded products such as the United States Oil Fund LP (ETF) (NYSE:USO) close to or into new bear markets. The recent slide in oil prices is renewing concerns about the high-yield corporate bond market, which was plagued last year amid a spate of energy-related credit downgrades and defaults.

Fancying Fallen Angels

For now at least, the VanEckFallen Angel High Yield Bond ETF (Market Vectors ETF Trust (NYSE:ANGL)) is finding ways to endure oil's most recent rough patch. Last year, ANGL benefited because, among junk bond ETFs at the time, its energy exposure was comparatively low. This year, ANGL is benefiting because, until recent weeks, oil prices were rebounding, lifting many of the fallen angel bonds from energy issuers that entered ANGL.

Fallen angel bonds are debt that comes to market with investment-grade ratings only to later be downgraded to junk status. Year-to-date, ANGL is up nearly 15 percent, a performance that is nearly triple that of the largest traditional junk bond ETF. Indicating that it can endure another oil slump, ANGL is higher by 1.2 percent over the past month, while the aforementioned USO is down nearly 17 percent.

Fallen Angels And Oil

Fallen angels have maintained their sector biases year to date, being meaningfully overweight the basic industry and energy sectors and underweight the healthcare sector, which positively contributed to outperformance relative to the broad high yield bond market. In addition, fallen angels' higher average credit quality and some notable tender offer activity positively contributed to outperformance.

Read more about fallen angels' 2016 bond buybacks. Conversely, fallen angels' overweight in the banking, utility, and insurance sectors negatively contributed to relative performance versus the broad high yield bond market, according to a recent VanEck note.

ANGL, which has a 30-day SEC yield of just over 6 percent, allocates 47.3 percent of its weight to energy and materials issuers. Importantly, only 3.4 percent of the issues in ANGL are rated CCC, the problem area for junk bonds over the past year, particularly those issued by energy companies.

Last month, VanEck said ANGL's new expense ratio is 0.35 percent, or $35 per $10,000 invested. In March, VanEck revealed that ANGL topped $100 million in assets under management. In less than three months, ANGL's assets have swelled to $273.3 million.

With ANGL, energy and materials are now meaningfully overweight, but have a higher average credit quality constituency, relative to the broad high yield bond market. This scenario is a prime example of the fallen angel thesis, and may help support how this subset of high yield bonds offers a sufficient combination of price appreciation and yield for a potentially optimal high yield bond allocation over the long term, added VanEck.

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