“Fallen angels,” below investment-grade corporate bonds that were rated investment grade at the time of their issuance, have thus far outperformed the broad high-yield corporate bond marketplace in 2012, signaling that the value proposition inherent in these issuances was likely at work once again this year, according to Fran Rodilosso, fixed income portfolio manager at Market Vectors ETFs.
Year-to-date through December 12, 2012, the BofA Merrill Lynch U.S. Fallen Angel High Yield Index (H0FA) gained 19.83 percent, versus 13.78 percent for BofA Merrill Lynch U.S. High Yield Master II Index (H0A0). If this trend continues, this would mark the fourth, out of the past five years, of outperformance by fallen angels versus the overall high-yield space.
“Yes, it was a strong year for virtually every part of the high-yield universe, but fallen angels are one category that performed particularly well,” says Rodilosso. While the positive performance of the past year may leave less scope for price appreciation in 2013, fallen angels still have a yield-to-worst* just inside that of the broader high-yield market. Angels have a longer duration* on average, but also a higher credit rating – nearly 76% of the BofA Merrill Lynch U.S. Fallen Angel High Yield Index were rated BB or above versus 41.12% of the BofA Merrill Lynch U.S. High Yield Master II Index, as of December 12, 2012.”
“With credit metrics having leveled off mid-year before deteriorating slightly in the second half of 2012, and with Europe likely providing additional downgrades as well, it seems likely in my view that the fallen angel universe will grow in 2013,” said Rodilosso. “There are actually fewer fallen angel bonds at the end of 2012 than there were at the beginning, though price appreciation has led to a higher overall market capitalization for the sector.”
“Several major names ascended out of the fallen angel category this year even as others saw their debt ratings lowered to fallen-angel status. Among the major departures from the fallen angels rolls this year were Ford, Pioneer Natural Resources, El Paso Pipeline and Sunoco. As many companies left, several interesting names joined the ranks of fallen angels in 2012,” continued Rodilosso, “including Arcelor Mittal, Rockies Express, Eksportfinans, Elepor, and subordinated debt issued by RBS, Lloyds and Credit Agricole.” “Interestingly,” added Rodilosso, “the BofA Merrill Lynch U.S. Fallen Angel High Yield Index, which underlies our fallen angel-focused ETF, included 89 percent U.S.-domiciled issuers at the beginning of 2012. Currently that percentage has dropped to 72 percent, making the Market Vectors Fallen Angel High Yield Bond ETF (NYSE ARCA: ANGL) a potentially compelling way to add exposure to European-based fallen angels that have been issued in the U.S.”
Mr. Rodilosso has 20 years of experience trading and managing risk in fixed income investment strategies, including 17 years covering emerging markets. Among the Market Vectors ETFs under his watch are Fallen Angel High Yield Bond ETF (NYSE Arca: ANGL), LatAm Aggregate Bond ETF (NYSE Arca: BONO), Emerging Markets Local Currency Bond ETF (NYSE Arca: EMLC), Emerging Markets High Yield Bond ETF (NYSE Arca: HYEM), International High Yield Bond ETF (NYSE Arca: IHY), Renminbi Bond ETF (NYSE Arca: CHLC) and Investment Grade Floating Rate ETF (NYSE Arca: FLTR). As of November 30, 2012, the total assets for these ETFs amounted to approximately $1.4 billion.
*Yield-to-Worst measures the lowest of either yield-to-maturity or yield-to-call date on every possible call date. Duration measures a bond’s sensitivity to a rise or fall in interest rates.
Van Eck Associates Corporation does not provide tax, legal or accounting advice. Investors should discuss their individual circumstances with appropriate professionals before making any decisions.
Please note that the information herein represents the opinion of the author and these opinions may change at any time and from time to time. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. Non-Van Eck Global proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
About Market Vectors ETFs
Market Vectors exchange-traded products have been offered since 2006 and span many asset classes, including equities, fixed income (municipal and international bonds) and currency markets. The Market Vectors family totals $27.9 billion in assets under management, making it the fifth largest ETP family in the U.S. and eighth largest worldwide as of September 30, 2012.
Market Vectors ETFs are sponsored by Van Eck Global. Founded in 1955, Van Eck Global was among the first U.S. money managers helping investors achieve greater diversification through global investing. Today, the firm continues this tradition by offering innovative, actively managed investment choices in hard assets, emerging markets, precious metals including gold, and other alternative asset classes. Van Eck Global has offices around the world and manages approximately $37.8 billion in investor assets as of September 30, 2012.
There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. Debt securities carry interest rate and credit risk. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. Credit risk is the risk of loss on an investment due to the deterioration of an issuer's financial health. The Funds' underlying securities may be subject to call risk, which may result in the Funds having to reinvest the proceeds at lower interest rates, resulting in a decline in the Funds' income.
The Fund may be subject to credit risk, interest rate risk and a greater risk of loss of income and principal than higher rated securities. Investors should be willing to accept a high degree of volatility and the potential of significant loss. Investments concentrated in the financial services and industrials sectors may be subject to more volatility than investments in a diverse group of sectors and are subject to the risks associated with such sectors. For a more complete description of these and other risks, please refer to the Fund’s prospectus and summary prospectus. The Fund may loan its securities, which may subject it to additional credit and counterparty risk. For a more complete description of these and other risks, please refer to the relevant Fund’s prospectus and summary prospectus.
Index returns assume the reinvestment of all income and do not reflect any management fees or brokerage expenses associated with Fund returns. Investors cannot invest directly in the Index. Returns for actual Fund investors may differ from what is shown because of differences in timing, the amount invested and fees and expenses.
BofA Merrill Lynch U.S. High Yield Master II Index (H0A0) is comprised of below-investment grade corporate bonds (based on an average of Moody’s, S&P and Fitch) denominated in U.S. dollars. The country of risk of qualifying issuers must be an FX-G10 member, a Western European nation, or a territory of the US or a Western European nation.
BofA Merrill Lynch US Fallen Angel High Yield Index (H0FA), a subset of H0A0, is comprised of below- investment grade corporate bonds denominated in U.S. dollars that were rated investment grade at the time of issuance.
The “net asset value” (NAV) of an ETF is determined at the close of each business day, and represents the dollar value of one share of the ETF; it is calculated by taking the total assets of an ETF subtracting total liabilities, and dividing by the total number of shares outstanding. The NAV is not necessarily the same as an ETF's intraday trading value. Investors should not expect to buy or sell shares at NAV. Total returns are based upon closing “market price” (price) of the ETF on the dates listed.
Fund shares are not individually redeemable and will be issued and redeemed at their NAV only through certain authorized broker-dealers in large, specified blocks of shares called “creation units” and otherwise can be bought and sold only through exchange trading. Creation units are issued and redeemed principally in kind. Shares may trade at a premium or discount to their NAV in the secondary market.
Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 888.MKT.VCTR or visit vaneck.com/etf. Please read the prospectus and summary prospectus carefully before investing.
Van Eck Securities Corporation, Distributor
335 Madison Avenue, New York, NY 10017