“Fallen angels”, corporate bonds that were investment grade at the time of issuance but have subsequently been downgraded to below investment grade, have significantly outperformed the broad corporate high-yield bond market this year, as measured by the BofA Merrill Lynch US Fallen Angel High Yield Index (H0FA) and BofA Merrill Lynch US High Yield Master II Index (H0A0), respectively.
As of December 9, 2014, H0FA had returned 7.35%, year to date, more than triple the 2.12% return from the broad high-yield bond H0A0 index. This has been due, in part, to H0FA’s lower exposure to the volatile energy sector, according to Fran Rodilosso, Senior Investment Officer for Market Vectors’ fixed income ETFs. Rodilosso noted that energy has been the largest sector weighting in the broad high-yield bond market for the past decade, growing progressively from approximately 8% to 18% year to date in 2014. The energy sector has been the largest contributor to new high-yield bond issuances since 2009.1
The year-to-date outperformance of fallen angels continues a pattern that has seen returns from investing in these bonds exceed those of the broader high-yield bond market in seven out of the last ten years. 2 “Fallen angels have offered a compelling value proposition,” Rodilosso said. “They often have stronger balance sheets compared to high-yield broadly, and institutions are often forced to sell them when investment-grade bonds are downgraded to high-yield, creating potential price inefficiencies. As a result, despite typically lower yields3 relative to the broad high-yield bond market (5.22% v. 6.66%, respectively, as of December 9, 2014), fallen angels have tended to have higher average ascension rates back to investment grade4 than original issue high-yield bonds, as measured by the BofA Merrill Lynch US Original Issue High Yield Index (H0HY), helping to contribute to the H0FA index’s long-term outperformance.”
Among the ETFs under Mr. Rodilosso’s watch is Market Vectors Fallen Angel High Yield Bond ETF (NYSE Arca: ANGL®), which seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the H0FA Index. ANGL’s underlying index, which is concentrated in BB-rated bonds5 with only about one-third the exposure to the energy sector as the broad high-yield bond market, has significantly outperformed the broad high-yield bond market with lower volatility, according to Rodilosso.
Key Differences Contributing to Outperformance:
BofA Merrill Lynch US Fallen Angel
High Yield Index (H0FA)
BofA Merrill Lynch U.S. High Yield
Master II Index (H0A0).
|Energy Sector Allocation||4.8%||13.7%|
|YTD Total Returns||7.35%||2.12%|
Source: BofA Merrill Lynch. Data as of 12/09/2014. Index performance is not illustrative of fund performance. Fund performance current to the most recent month end is available by visiting marketvectorsetfs.com or by calling 888.MKT.VCTR. Historical performance is not indicative of future results; current data may differ from data quoted. Indexes are unmanaged and are not securities in which an investment can be made.
Mr. Rodilosso has over 20 years of experience trading and managing risk in fixed income investment strategies, including more than 17 years covering emerging markets. In addition to ANGL, the Market Vectors ETFs under his watch are Investment Grade Floating Rate ETF (NYSE Arca: FLTR®), Treasury-Hedged High Yield Bond ETF NYSE Arca: THHY®), Emerging Markets Aggregate Bond ETF (NYSE Arca: EMAG®), Emerging Markets High Yield Bond ETF (NYSE Arca: HYEM®), Emerging Markets Local Currency Bond ETF (NYSE Arca: EMLC®), ChinaAMC China Bond ETF (NYSE Arca: CBON), and International High Yield Bond ETF (NYSE Arca: IHY®). As of November 30, 2014, the total assets for these ETFs amounted to approximately $1.7 billion.
1Source: J.P Morgan
2Source: BofA Merrill Lynch. Data as of 12/31/2013.
3 As measured by yield to worst, which measures the lowest of either yield-to-maturity or yield-to-call date on every possible call date.
4Source: BofA Merrill Lynch. Data as of 9/30/2014. Based on rolling 12-month average ascension rates to investment grade since 12/31/2004.
5BofA Merrill Lynch composite ratings are simple averages of ratings from Moody's, S&P, and Fitch. This composite is not intended to be a credit opinion.
6Duration measures a bond's sensitivity to interest rate changes that reflects the change in a bond's price given a change in yield.
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 totaled approximately $21.6 billion in assets under management, as of November 30, 2014, making it one of the largest ETF families in the U.S. and worldwide.
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.
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.
BofA Merrill Lynch US Original Issue High Yield Index (H0HY) is a subset of The BofA Merrill Lynch US High Yield Index including securities that were not rated investment grade at the time of issuance.
The Funds may be subject to credit risk, interest rate risk and a greater risk of loss of income and principal than those holding higher rated securities. As the Funds may invest in securities denominated in foreign currencies and some of the income received by the Funds may be in foreign currency, changes in currency exchange rates may negatively impact the Funds’ returns. Investments in emerging markets securities are subject to elevated risks which include, among others, expropriation, confiscatory taxation, issues with repatriation of investment income, limitations of foreign ownership, political instability, armed conflict, and social instability. The Funds may loan their securities, which may subject them to additional credit and counterparty risk. The Funds may be subject to risks associated with investing in high-yield securities; which include a greater risk of loss of income and principal than funds holding higher-rated securities, as well as concentration risk; credit risk; hedging risk; interest rate risk; and short sale risk. Investors should be willing to accept a high degree of volatility and the potential of significant loss. For a more complete description of these and other risks, please refer to the Funds’ prospectus and summary prospectus.
An investment in ANGL may be subject to risk which include, among others, credit risk, call risk, and interest rate risk, all of which may adversely affect the Fund. High yield bonds may be subject to greater risk of loss of income and principal and are likely to be more sensitive to adverse economic changes than higher rated securities. International investing involves additional risks which include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability. The Fund's assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.
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