The Strategic Appeal of Fallen Angel Bonds in a High-Yield ETF Landscape

The high-yield bond market has long been a cornerstone for income-focused investors, but a niche subset of this space—fallen angel bonds—has emerged as a compelling alternative. These are corporate bonds that have been downgraded from investment grade to high-yield status, often retaining higher credit quality than the broader junk bond universe. The iShares Fallen Angel Fund ETF (ANGL) offers a focused vehicle to access this segment, combining consistent income generation with a risk-adjusted return profile that outperforms many broad high-yield ETFs.

ANGL’s strategy centers on the ICE US Fallen Angel High Yield 10% Constrained Index, which tracks bonds that have recently fallen from investment grade. This approach inherently filters out the lowest-quality issuers, as fallen angels are more likely to maintain BB ratings (just below investment grade) compared to the broader high-yield market, where CCC-rated bonds dominate [4]. Historically, this credit discipline has paid dividends: the ICE index has outperformed the Bloomberg U.S. High Yield Index in 14 out of 20 years, including a 2.36% edge in 2021 [3].

The ETF’s 30-Day SEC Yield of 6.87% [5]—a key metric for income-focused investors—reflects its exposure to higher-quality, higher-yielding bonds. While this yield is slightly lower than FALN’s 7.18%, ANGL’s risk-adjusted returns are more compelling. Over the past 12 months, ANGL has delivered a Sharpe Ratio of 1.13 and a Sortino Ratio of 1.57, outperforming FALN’s 1.07 and 1.51, respectively [1]. These metrics underscore ANGL’s ability to generate returns while mitigating downside volatility, a critical advantage in a market where rising interest rates and economic uncertainty amplify risks.

ANGL’s outperformance is not accidental. Fallen angel ETFs like ANGL benefit from sector tilts and tighter credit spreads. For instance, the ICE index has historically maintained a greater overweight in BB-rated bonds and an underweight in CCC-rated bonds compared to the broader high-yield market [4]. This focus on higher-quality fallen angels reduces the likelihood of defaults while capturing the yield premium typically associated with junk bonds. In a rising rate environment, such a strategy has proven resilient: ANGL’s index outperformed the broad high-yield index during 2004–2006 and 2015–2019 [4].

However, ANGL is not without risks. Its duration of 3.33 years [5]—longer than the 2.85 years of USHY—makes it more sensitive to interest rate hikes. During market corrections, such as the 2020 downturn, fallen angel funds have experienced sharper declines than broad high-yield ETFs [5]. Yet, for investors seeking a balanced approach, ANGL’s combination of income and risk management offers a compelling case. Its 6.87% yield [5] is significantly higher than the 4.64% annualized return of the Bloomberg U.S. High Yield Index over the past decade [5], while its Calmar Ratio of 1.31 and Martin Ratio of 6.39 [1] suggest strong performance relative to drawdowns.

In a landscape where broad high-yield ETFs like USHY (Sharpe Ratio: 1.47) and HYMB (Sharpe Ratio: -0.37) [2] exhibit mixed risk-adjusted returns, ANGL’s disciplined focus on fallen angels provides a differentiated path. While its 0.35% expense ratio is higher than FALN’s 0.25%, the trade-off for superior risk management and consistent income may justify the cost for investors prioritizing long-term capital preservation alongside yield.

For those seeking to diversify their high-yield allocations, ANGL represents a strategic play. Its historical outperformance, coupled with its ability to generate a robust 6.87% yield [5], positions it as a compelling option in today’s market. As the high-yield landscape evolves, fallen angel bonds—via vehicles like ANGL—offer a unique blend of income and risk mitigation that aligns with both defensive and growth-oriented portfolios.

Source:
[1] FALN vs. ANGL — ETF Comparison Tool [https://portfolioslab.com/tools/stock-comparison/FALN/ANGL]
[2] iShares Broad USD High Yield Corporate Bond ETF (USHY) [https://portfolioslab.com/symbol/USHY]
[3] Fallen Angel Bonds: Higher Quality High Yield [https://www.etf.com/sections/etf-industry-perspective/fallen-angel-bonds-higher-quality-high-yield]
[4] Fallen Angels Index Outperformed Broad High Yield Index Again 14 Out of 18 Years [https://www.etftrends.com/tactical-allocation-channel/fallen-angels-index-outperformed-broad-high-yield-index-again-14-out-of-18-years/]
[5] Fallen Angel ETFs Have Outperformed With Yields Around 7%—But Are Risky [https://www.tradealgo.com/news/fallen-angel-etfs-have-outperformed-with-yields-around-7---but-are-risky]