Fallen Angels ETF: Up-and-Comer

06/15/2016 9:00 am EST

Focus: ETFs

There’s an up-and-coming ETF making a name for itself in the high-yield corporate bond category; it has a unique strategy for managing risk while generating attractive yields, suggests Tim Begany in Personal Finance.

Launched four years ago, VanEck Vectors Fallen Angel High-Yield Bond (ANGL) picks from fallen angels—corporate bonds that had investment-grade credit ratings but lost them.

Most high-yield funds focus on bonds that started out with non-investment-grade ratings (below BBB), as these typically carry the highest yields.

However, the issuers are often speculative, smaller companies with serious financial concerns — like heavy debt or a history of losses — and B credit ratings signifying high risk of default.

Fallen angels, though, are safer because they’re typically from larger once-successful companies that have hit a rough patch. The fund is 76% BB-rated bonds; this rating is typical of fallen angels and of the high-yield category’s best prospects.

Companies with that rating often still have abundant financial resources and promising turnaround potential. Many avoid further ratings downgrades or even regain investment-grade status.

ANGL is currently about two-thirds U.S. and one-third foreign bonds. By sector, ANGL’s largest investments are in energy (25%) and raw materials (22%).

The fund's top holdings are SLM Corp. (SLM), the student loan outfit known as Sallie Mae; Southwestern Energy (SWN), a gas drilling; and copper and gold producer Freeport McMoRan (FCX).

The fund currently yields 4.9% and is up about 12% year-to-date. In the trailing one- and three-year periods, it returned an annualized 2.8% and 4.8%, respectively, besting the high-yield ETF category averages of a -1.8% and 1.2%.

Like other high-yield funds, ANGL can be volatile, with price fluctuations more than twice as great as the Barclays U.S. Aggregate Bond Index.

If you are comfortable with this risk level, buy this ETF for high-yield bond exposure; more conservative investors should keep only a limited portion of their high-yield allocation in the fund.

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By Tim Begany, Editor of Personal Finance

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