VanEck launches ‘fallen angel’ and high-yield EM corporate bond ETFs on LSE

Mar 23rd, 2018 | By | Category: Fixed Income

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VanEck has launched a pair of high-yield corporate bond ETFs on the London Stock Exchange: the VanEck Vectors Global Fallen Angel High Yield Bond UCITS ETF and the VanEck Vectors Emerging Markets High Yield Bond UCITS ETF.

VanEck launches 'fallen angel' and high-yield EM corporate bond ETFs on LSE

VanEck has launched two new high-yield corporate bond ETFs on the LSE, providing exposure to fallen angels and EMD.

The funds provide exposure to global ‘fallen angels’ and emerging market debt, and become the issuer’s seventh and eighth ETFs to be listed on the exchange.

They are linked to indices provided by ICE Data Indices, the indexing division of exchange operator Intercontinental Exchange.

Global fallen angel bonds

The VanEck Vectors Global Fallen Angel High Yield Bond UCITS ETF enables investors to benefit from potential temporary mis-valuations as a result of credit rating downgrades. It tracks the ICE BofAML Global Fallen Angel High Yield Index, which measures the performance of fallen angel bonds denominated in US dollars, pounds sterling, euros, or Canadian dollars from developed markets.

A fallen angel is a bond that was awarded an investment-grade rating at issuance but has since been reduced to sub-investment grade status.

In order to be included in the index, the bond must have had minimum term to maturity of 18 months at issuance, and the minimum remaining term at the point of inclusion must be 12 months. The minimum issue size must be $250 million, €250m, £100m, or C$100m.

Bonds denominated in US dollars make up the majority of the fund’s exposure at 70.1%, with euro-denominated bonds accounting for a further 21.7%. The largest country exposures are to the US (26.1%), Brazil (18.8%), Italy (10.4%), the UK (7.3%) and Israel (6.1%). Financials and energy lead the sector exposures with 29.8% and 22.4% respectively, followed by consumer staples (13.3%) and materials (12.1%).

The vast majority of bonds in the index, accounting for 84.6% of the total exposure, are rated BB with most of the remaining exposure in bonds rated B.

The strategy is based on the premise that the overly negative sentiment surrounding a downgrade into junk status causes fallen angels to be regularly oversold as investors (often forced by their investment mandate) sell en masse prior to and at downgrade, leading to a price anomaly.

“As a result of the rating downgrades, corporate bonds are often sold off because their risk profile no longer meets the requirements of institutional investors or indices,” explains Dominik Poiger, trader and ETF portfolio manager at VanEck.

“This often results in a temporary price distortion. On average, fallen angels reach their lowest valuation approximately six months after the rating downgrade, after which the recovery phase begins. The valuation level from before the downgrade is often achieved again.”

According to VanEck, the strategy has historically outperformed the global high-yield market in both absolute and risk-adjusted terms.

The ETF may appeal to yield-hungry investors who are willing to assume increased credit risk. The yield on the fund is 4.9%, and there is moderate interest rate risk with an effective duration of 4.9 years. Income generated within the portfolio is reinvested into the fund.

The ETF has been listed with two share classes, one denominated in US dollars (Ticker: GFA LN) and the other in pounds sterling (GFGB LN). It total expense ratio (TER) is 0.40%.

VanEck has offered the same fallen angels strategy within a US-listed ETF for over five years. The VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL US) has over $1.1bn in AUM and is a little cheaper at costs of 0.35% per annum.

There are two other fallen angels ETFs currently listed on the LSE: the iShares Fallen Angels High Yield Corporate Bond UCITS ETF (WING LN) from BlackRock and the PowerShares US High Yield Fallen Angels UCITS ETF (HYFA LN) from Invesco.

Emerging market bonds

The VanEck Vectors Emerging Markets High Yield Bond UCITS ETF offers investors access to high-yield corporate bonds from emerging market issuers. It tracks the ICE BofAML Diversified High Yield US Emerging Markets Corporate Plus Index which comprises fixed coupon issues denominated in US dollars with a remaining term of at least 12 months and an issue size of at least $300m.

“The market for high-yield bonds from emerging markets is becoming increasingly efficient,” said Poiger. “In the past few years alone, the volume on the market has doubled and is expected to continue to grow. Emerging markets high-yield bonds are thus an attractive asset class for the long-term, offering a similarly high yield to US high-yield bonds, but with a lower duration and better credit rating.”

Brazil, Argentina, and Turkey account for the largest country exposures with 13.5%, 10.9%, and 10.2% respectively. Financials and energy also top the sector exposures with 27.8% and 19.6% respectively, followed by consumer staples with 11.2%.

Most bonds in the index are rated BB, accounting for 60.4% of the total exposure, followed by bonds rated B with 24.2%. The fund offers a yield to maturity of 6.3% with an effective duration of 3.8 years.

The ETF has been listed with two share classes, one denominated in US dollars (Ticker: HYEM LN) and the other in pounds sterling (Ticker: HYGB LN). Its TER is also 0.40%.

The emerging market corporate bond space is still relatively underdeveloped in Europe, in terms of ETF listings, and this is the first to focus exclusively on junk bonds. The nearest alternatives – the iShares JP Morgan $ EM Corp Bond UCITS ETF (EMCP LN) and the SPDR BofA Merrill Lynch Emerging Markets Corporate Bond UCITS ETF (EMCO LN) – include both investment-grade and sub-investment grade EMD.

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