The Market Vectors Fallen Angel High Yield Bond ETF (NYSE Arca: ANGL), which tracks the Bank of America Merrill Lynch US Fallen Angel High Yield Index, finished the first quarter of 2016 as the top performing exchange-traded fund in the high yield fixed income category. According to data from Morningstar, the ETF returned 7.39% from January through to the of March while the Bank of America Merrill Lynch US High Yield Index (a proxy for the broad US high yield bond market) returned 3.25% over the same period.

Fran Rodilosso, Portfolio Manager for Fixed Income ETFs with VanEck.

The ETF invests in ‘fallen angels’ – a term used to describe bonds that were rated as investment grade at the time of their original issuance, but which have since lost their investment-grade status. Original-issue high yield bonds tend to offer relatively higher income and lower duration than fallen angels. These differences in bond characteristics as well as the overly negative sentiment surrounding a downgrade into junk status, cause fallen angels to be regularly oversold prior to their downgrade. In this way, the fund may provide investors with a value proposition.

Fran Rodilosso, Portfolio Manager for Fixed Income ETFs with VanEck, the asset manager behind the Market Vectors range of ETFs, commented: “ANGL presents investors with a contrarian investment approach, as it tends to increase weights in sectors as they are still under ratings pressure. 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 index already pricing in a high degree of risk.”

Rodilosso explains that, in this instance, the fund’s increased allocation to the energy sector from approximately 13% to 25% played a pivotal role in the ETF’s performance. “Much of ANGL’s positive performance came from increased exposure to the energy space,” he said. “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 by likening the current energy sector-driven performance to the distaste for 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,” he said. “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.”

The Market Vectors Fallen Angel ETF, which recently surpassed $100m in assets under management, is one of several unique income-focused ETFs from VanEck which also include the Market Vectors Emerging Markets High Yield Bond ETF (HYEM), the Market Vectors JP Morgan EM Local Currency Bond ETF (EMLC), and the Market Vectors High Income MLP ETF (YMLP).