When the Smart Money Sells: Is Fallen Angel Outperformance Priced In?

The move by Peak Financial Advisors is a clear signal from sophisticated capital. The firm sold its entire $7.03 million position in the VanEck Fallen Angel High Yield Bond ETF (ANGL) in early January, according to an SEC filing. This isn't an isolated trim. Last quarter, Ocean Park Asset Management executed a similar full exit from the competing iShares Fallen Angels ETF (FALN), cashing out a position worth about $31.5 million. Two major players stepping back from these funds just as they look most attractive on yield grounds is a notable pattern.

The core thesis here is one of expectations resetting. The fallen angel strategy delivered strong results in 2025, outperforming the broad high yield market by 0.53% for the year. That outperformance was driven by security selection and a favorable duration profile. For 15 of the last 22 years, fallen angels have beaten the broader high yield index. The market has clearly priced in that historical edge and the recent success.

Now, with these large, strategic investors exiting, the setup for 2026 looks different. The strategy's outperformance may be largely priced in. The expectation gap is that the same level of security selection alpha and duration benefit may not be available at current valuations. The sophisticated capital is essentially saying: the easy money from this specific credit niche has been made. The sell signal is a warning that the next leg of outperformance will require finding new sources of alpha, not just riding the historical trend.

The Expectation Gap: What's Priced In vs. What's Ahead

The recent outperformance is now the baseline. The strategy's 0.53% YTD outperformance over broad high yield is a tangible result, but it's also a key piece of data that the market has digested. This isn't a surprise; it's the new expectation. The 15-year track record of outperformance is not a guarantee, but it has been the priced-in narrative for years. The sophisticated capital selling is a bet that this historical edge has been fully reflected in current valuations.

The forward catalyst is massive but concentrated. JP Morgan projects $84bn of fallen angels in 2026. That volume is a direct source of potential alpha, but the risk is in the concentration. Much of this volume is tied to a few large potential downgrades, meaning the security selection opportunity is less about broad market timing and more about picking the right names from a limited pool. The easy money from a broad, diversified downgrading cycle may be gone.

At the same time, the headwinds are building. Credit spreads are tight, which leaves less room for error. More importantly, the AI infrastructure build-out is set to amplify dispersion across the market. As hyperscalers fund massive new spending, the credit landscape will become more fragmented. In this environment, picking winners becomes harder, not easier. The very factors that create opportunity-idiosyncratic credit migration and sector-specific downgrades-also increase the risk of being wrong.

The bottom line is a reset of the expectation gap. The market has priced in the historical outperformance and the recent YTD gain. The forward path now depends on navigating a concentrated downgrading wave within a more volatile, AI-driven market. For the strategy to deliver again, it will need to generate alpha from security selection in a tighter, more complex environment. The easy money may be made, but the next leg requires sharper knives.

Analyst Consensus and Price Targets: The Whisper Number

The broader market consensus, as reflected in analyst views, appears to be looking past the security selection wins of 2025. The strong recent performance of the ETFs themselves-ANGL up 9% over the past year and FALN up about 3%-is a tangible result, but it may be the very data that has already been priced in. Analysts are likely focusing on the forward-looking challenges: the concentration of the 2026 downgrading wave and the increased dispersion risks ahead, which could amplify the difficulty of generating alpha.

This sets up a classic expectation gap. The whisper number for the strategy has been reset. The historical edge-15 years of outperformance out of the last 22-is now the baseline. The forward path depends on navigating a concentrated downgrading wave within a more volatile, AI-driven market. As the recent sales by sophisticated capital suggest, the easy money from a broad, diversified downgrading cycle may be gone. The expectation gap is the difference between that priced-in historical success and the harder, more concentrated security selection required in 2026.

For the strategy to deliver again, it will need to generate alpha from picking winners in a tighter, more complex environment. The recent exits from ANGL and FALN by major players are a signal that the market may be pricing in the historical outperformance but not the heightened risks ahead. This could lead to a guidance reset if the concentrated downgrading wave fails to materialize as expected, or if the AI-driven dispersion creates more volatility than anticipated. The whisper number is shifting from "fallen angels will outperform" to "fallen angels will outperform, but only if you pick the right names from a limited pool."

Catalysts and Risks: What to Watch for the Thesis

The expectation gap thesis hinges on a few forward-looking events. The first is the actual 2026 fallen angel volume and the specific issuers involved. JP Morgan's projection of $84bn of fallen angels is the key catalyst. If the actual flow matches this estimate, it confirms the concentrated downgrading wave is materializing. But the market will scrutinize the quality of the names. The 2025 outperformance was driven by security selection within sectors and specific new entrants like Celanese and Nissan. The "easy money" from broad, diversified downgrades may be gone; the alpha now depends on picking winners from a limited pool. A mismatch between the projected volume and the actual, idiosyncratic issuers will test whether the strategy's edge remains.

Second, monitor credit spread movements and default rates. Tight spreads leave less room for error and limit upside potential. Evidence suggests spreads are tight but may be justified given improving credit quality. However, the upcoming AI infrastructure build-out is set to amplify dispersion across the market. This creates a dual risk: spreads could widen if dispersion leads to volatility, or they could remain tight while default rates rise on stressed issuers. Either scenario pressures the fallen angel strategy, which relies on price recovery from discounted downgrades.

Finally, track the performance of the ETFs themselves relative to broad high yield. The recent sales by sophisticated capital suggest the market has priced in the historical outperformance. A sustained underperformance of ANGL or FALN against the broader index would signal the sell-off is justified. It would confirm that the security selection alpha and duration benefit are no longer available at current valuations. Conversely, a return to strong outperformance would indicate the market's pessimism is overdone and the concentrated downgrading wave is delivering the expected alpha. The ETF's price action is the real-time barometer of the expectation gap.