ETF Talk: A Fallen Angel ETF Appears Ready for Redemption

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker, financial journalist, and money manager.

With the current state of affairs, it is especially hard for anyone, even me, to predict the future.

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Conflicts like the clashes between Israel and Hamas in Gaza and the war taking place between Russia and Ukraine affect countries throughout the globe beyond the territories of turmoil and United States. Because of this, investors are searching for investment opportunities outside of the norm.

As mentioned in my previous ETF talks, one of these investment strategies involves trading “fallen angel bonds.” This week’s exchange-traded fund (ETF) features iShares Fallen Angels USD Bond ETF (NASDAQ: FALN). Allow me to describe its purpose.

The two types of bonds to focus on here are investment-grade and high-yield. A fallen angel is an investment-grade bond whose value drops to high-yield status because of a credit downgrade. High-yield bonds pay heightened interest rates, but are riskier to hold, as well as have a higher chance of default.

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Since a bond’s credit rating is permeable, it can change based on the economic status of the issuer. When the credit rating of a previously investment-grade bond deteriorates to high-yield status, we call it a fallen angel bond.

Now, you may wonder, why invest in them?

Fallen angel bonds bring about several benefits. One of them is diversification. In a recent study from Bloomberg, in the long-term, fallen angels outperform the broad investment-grade (IG) and high-yield (HY) market. Obviously, past performance is not a guarantee of future performance, but this study can shed some light on how the fallen angel bonds have held up.

The iShares Fallen Angels USD Bond ETF (NASDAQ: FALN) allows for exposure to a subset of high-yield bonds that were previously recognized as investment-grade. This ETF can be used by investors to try to capture the potential opportunity for profits that can become possible when a bond is downgraded from investment grade.

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Some of the top holdings in FALN’s portfolio are Vodafone Group PLC (NASDAQ: VOD), Western Digital Corporation (NASDAQ: WDC), Newell Brands Inc. (NASDAQ: NWL) and Nordstrom Inc. (NYSE: JWN).


Chart courtesy of www.stockcharts.com.

As of June 11, FALN has climbed 2.3% year to date and has a 1-year return of 11.4%. The fund further has amassed $1.7 billion in assets under management and has an expense ratio of 0.25%.

Overall, the FALN ETF may be a good choice for investors looking for exposure to the fallen angel bond sector, but it is wise to consider the risks and potential returns before making any investment decisions.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to email me. You may see your question answered in a future ETF Talk.

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