Investors rushing to bet on a revival in pandemic-hit companies are driving unprecedented demand for ETFs that track beaten-down bonds.
With the economic reopening boosting corporate earnings in cyclical sectors, assets in U.S. exchange-traded funds buying so-calledfallen angels-- debt recently stripped of investment-grade status --have doubled in 2021 and just hit $10 billion,according to data compiled by Bloomberg.
The two major products, the $Ishares Fallen Angels Usd Bond Etf (FALN.US)$and the $VanEck Vectors Fallen Angel High Yield Bond (ANGL.US)$, are on track for a historic 2021 with inflows of $4.3 billion and $1 billion, respectively.
In an environment of higher inflation and potentially higher rates, the fallen angels should fare quite well. They are predominantly in cyclical sectors and they have also been through quite significant deleveraging programs already.
- said Peter Chatwell, head of multi-asset strategy at Mizuho International Plc.
The bonds of newly downgraded companies are typically oversold before recovering -- the basis of the fallen-angel trade. Thanks to pandemic stimulus and the fading lockdown era, investors are still piling in 18 months after corporate debt was battered in the Covid rout.
By scooping up newly relegated securities and riding the rebound, $Ishares Fallen Angels Usd Bond Etf (FALN.US)$ and $VanEck Vectors Fallen Angel High Yield Bond (ANGL.US)$ have outperformed virtually every category of bonds this year, from inflation-protected securities to high-yield debt. Given that the funds are largely made up of economically sensitive sectors, the outperformance should continue, according to Mizuho.
Energy and telecom companies make up the bulk of holdings in FALN and ANGL.
The fallen angel ETFs are likely also benefiting from a rotation away from products more vulnerable to rising yields and price pressures like $Ishares Iboxx $ Investment Grade Corporate Bond Etf (LQD.US)$or $iShares 20+ Year Treasury Bond ETF (TLT.US)$, Chatwell said. Both of those funds have relatively high duration -- a measure of sensitivity to interest-rate changes -- and have posted two straight months of outflows, according to Bloomberg data.
Source: Bloomberg