Van Eck Global’s Market Vectors ETF Trust has launched an exchange-traded fund that will focus on U.S.-issued “Fallen Angels”— corporate bonds that were rated investment grade at the time of their original issuance but which have since been downgraded to below investment grade status.
The fund, Market Vectors Fallen Angel High Yield Bond ETF, is marketed by the company as the the first U.S.-listed ETF designed to specifically address this segment of the U.S. corporate high yield bond market.
“Fallen angle bonds have a demonstrated potential for high performance,” said Market Vectors marketing director Ed Lopez, during a Tuesday morning conference call announcing the launch.
The fund will try to replicate as closely as possible, before fees and expenses, the price and yield performance of The BofA Merrill Lynch US Fallen Angel High Yield Index, which is comprised of below investment grade corporate bonds denominated in U.S. Dollars that were rated investment grade at time of issuance.
Currently, the portfolio consists of 62.74% of corporate debt from industrial companies, including 11.42% from basic industry and 6.3% from automotives. Another 32.92% comes from the financial sector, with 25.08% from banks and 5.39% from financial service companies. Another 4.33% comes from utilities.
It is managed by Fran Rodilosso and has a net expense ratio of 40 basis points.
During the conference call, Rodilosso said that Fallen Angel issuers tend to be more established brand name companies with large capitalizations that have had liquidity or leverage issues leading to their ratings downgrades. Many fit within the BB borrower rating category, and “have some work to do to hopefully get back to investment grade status.”
However, Rodilosso says that this debt, as represented by The BofA Merrill Lynch U.S. Fallen Angel High Yield Index, has outperformed general U.S. dollar denominated corporate high yield bonds, as represented by The Barclays Capital High Yield Very Liquid Index, in six of the past nine years ending in 2011.
Also, these issuers are often forced to sell certain holdings when they are reclassified as speculative grade debt, which “create good buying opportunities,” said Rodilosso.
Tommy Fernandez writes for Money Management Executive.