Dive into the World of Fallen Angels: A Hidden Gem in the Bond Market
When it comes to investing, it’s easy to overlook certain corners of the market. One area that often flies under the radar but is currently shining bright is the world of “fallen angels” bonds. These bonds are ones that have recently been downgraded from investment grade to high yield. And while they may seem risky, they are actually outperforming in today’s market.
Typically, when bonds get downgraded, institutional investors are forced to sell them off. This creates an imbalance in supply and demand, causing the prices to drop in the short term. But here’s where the opportunity lies – as the supply and demand come back into balance, the gap closes, and these fallen angel bonds start to outperform.
There are two main exchange-traded funds (ETFs) that invest in this space: iShares Fallen Angels USD Bond ETF (FALN) and VanEck Fallen Angel High Yield Bond ETF (ANGL). These funds have attractive 30-day SEC yields of 7.18% and 6.87%, respectively, making them a compelling option for investors looking for higher returns.
One key strategy to consider is Bank of America’s dynamic prudent yield approach, which focuses on bonds with more exposure to the real economy and less exposure to risks from inflation and interest rates. This year, the prudent yield sector ETFs have been outperforming traditional bond indexes by a significant margin, showing the strength of fallen angel bonds in today’s market.
What sets fallen angel bonds apart is their quality – they are generally higher quality than traditional high-yield bonds, with about 70% of them rated just below investment grade at BB. Despite this, there is still a risk of further credit downgrades, so it’s essential to stay informed and monitor the performance of these bonds closely.
In terms of historical performance, fallen angel bonds have shown annualized returns of 7.25% over the past 10 years, outperforming both high-yield and investment-grade bonds. While they may be riskier than traditional bond funds, they can provide a valuable addition to a well-diversified portfolio, offering a potential boost during market corrections.
So, if you’re looking to add a little extra juice to your investment portfolio, consider exploring the world of fallen angels bonds. With their potential for high returns and unique market dynamics, they could be the hidden gem you’ve been searching for in the bond market. Stay ahead of the curve and consider adding fallen angels to your investment strategy today.