Global exchange-traded fund issuer iShares has launched an ETF offering investors exposure to ‘fallen angel’ bonds. The iShares Fallen Angels High Yield Corporate Bond UCITS ETF (WING) provides exposure to global bonds that were once rated investment grade and have since been downgraded to high yield status.
‘Fallen angels’ are bonds that were rated as investment grade at the time of their original issuance, but which have since lost their investment-grade status.
Listed on the London Stock Exchange in US dollars and British pounds, and on the Deutsche Bourse in euros, the ETF is physically replicating and has a total expense ratio (TER) of 0.50%.
A ‘fallen angel’ refers to a bond that has been downgraded from investment grade to high yield, and can appeal to investors seeking to take advantage of the price anomaly that can arise with a downgrade of these securities (the overly negative sentiment surrounding a downgrade into junk status, causes fallen angels to be regularly oversold prior to their downgrade). Furthermore, original-issue high yield bonds tend to offer relatively higher income and lower duration than fallen angels.
Brett Olson, Head of iShares EMEA Fixed income, commented in a statement: “Bond ETFs have had a record start to the year, with year-to-date net global flows at over $60bn. We are seeing investors using ETFs to access assets across the fixed income spectrum as they seek to diversify their portfolios against a challenging low yield backdrop, and do so at a lower cost.
“Our clients tell us that they want more innovative fixed income products as they seek to boost the potential for yield in out-performance. Through this fund, investors have the opportunity to capitalise on the potential additional performance that can result from the historical fallen angel bonds price anomaly.”
The underlying index of the fund is the Barclays Global Corporate ex EM Fallen Angels 3% Issuer Capped Index, which has returned 12.1% year-to-date (YTD), as of 1 July 2016. The index has exposure to over 450 holdings with a cap on a single issuer of 3% of the total market value to ensure diversification. Emerging market issuers and bonds rated below B- are excluded as part of its screening process. The index is rebalanced on a monthly basis.
As of 1 July 2016, the fund has significant exposure to the US (46.3%), Italy (12.0%), the UK (10.5%) and France (7.9%). The largest sector exposures are in energy (17.7%), banking (17.6%), basic industry (16.7%), communications (11.6%) and consumer non-cyclical (8.3%). The largest credit quality within the fund are bonds rated BB (75.6%) followed by those rated B (19.6%). The weighted average yield-to-maturity is 5.3% and the fund’s effective duration is 5.1 years.
High yield has been a strong performer this year. Data from Morningstar shows in the first quarter of the year the Bank of America Merrill Lynch US High Yield Index (a proxy for the broad US high yield bond market) returned 3.25%, YTD it is around 9%. The ‘fallen angel’ strategy has outstripped even this significant performance though. The BofA Merrill Lynch US Fallen Angel High Yield Index, which underlies the $200m VanEck Vectors Fallen Angel High Yield Bond ETF (NYSE Arca: ANGL) is up 13.1% YTD.
Van Eck reduced the ETF’s TER last month to 0.35%.