Home etftrends.com The Evolution of Retail Within Fallen Angels

The Evolution of Retail Within Fallen Angels

In April, fallen angels (as represented by the ICE US Fallen Angel High Yield 10% Constrained Index, “H0CF”) underperformed the broad high yield market (as represented by the ICE BofA US High Yield Index, “H0A0”) by 0.74% (-1.74% vs -1.00%). Year to date, fallen angels are now lagging by 0.66%, with returns of -0.16% vs 0.50% for the broad high yield market as longer duration continues to impact fallen angels. Within broad high yield, single B rated bonds outperformed BB and CCC & below rated bonds in April, while CCC & below rated bonds continue to outperform higher quality YTD.

Retail sector exposure within the fallen angel universe has increased to almost 20% from only about 6% in December 2022, due mainly to two large fallen angels and rising stars in other sectors. Retail is now the largest sector in the index. Below is a quick recap of what has brought us to this point:

In December 2022, Retail exposure in the Index was comprised of 10 issuers across 4 industries: Specialty Retail (approximately 0.9% weight), Department Stores (approximately 3.5%), Food & Drug Retailers (approximately 0.5%) and Restaurants (approximately 0.9%), with Nordstrom being the largest issuer at 2.0% weight.

By November 2023, Retail sector exposure increased to just under 10%, as the index was experiencing multiple rising stars from other sectors. In December 2023, Walgreens entered the index with a 5% weight (approximately $4.4 billion par amount) following its downgrade by Moody’s, reflecting its high financial leverage and losses in its U.S. healthcare segment, bringing the sector exposure to approximately 14% of the index.

In February 2024, Advance Auto Parts entered the index with a 2% weight (approximately $2 billion of par amount), following its downgrade by Moody’s due to expected lower sales growth and higher expenses, bringing total Retail exposure to 17%.

Overall Retail exposure is currently comprised of 11 different issuers within four industries: Specialty Retail (approximately 4.3% weight), Department Stores (approximately 6.9%), Food & Drug Retailers (approximately 7.3%) and Restaurants (approximately 1.1%). Retail has been the best performing sector over the past 12 months, with a 16.51% return, and the second highest performing sector over the past six months, behind Financial Services, as it posted 15.69% contributing positively to the fallen angel index performance. Most of the performance has come from approximately 300bps of spread tightening over the last 12 months.

Compared to other sectors, Retail has the longest duration (6.5), followed closely by Telecom, the second largest exposure. Retail has always been one of the sectors with a long duration due to the inclusion of YUM Brands (9.9), Macy’s (9.8) and Marks & Spencer (8.4). Walgreens added to the duration length, as it entered the index with an average duration of 7.8.

12/31/233/31/244/30/2412/31/233/31/244/30/24
Yield to Worst6.996.927.437.697.758.20
Price91.2091.2289.2591.8693.1891.88
Effective Duration5.415.325.203.313.283.36
Full Market Value ($mn)67,82164,65757,9551,237,7211,260,5421,245,972
OAS285247255339315318
No. of Issues1431381301,8371,8641,864

Source: ICE Data Services, VanEck. Fallen Angels: ICE US Fallen Angel High Yield 10% Constrained Index. Broad HY: ICE BofA US High Yield Index. OAS refers to “option-adjusted spread.” Please see definition for this and other terms referenced herein in the disclosures and definitions portion of this blog. Past performance is no guarantee of future results. Index performance is not representative of strategy performance. It is not possible to invest in an index.

New Fallen Angels: None in April.

JanuaryHudson Pacific Properties LPBB1Real EstateREITs2.1888.05
FebruaryAdvance Auto Parts Inc.BB1RetailSpecialty Retail2.5291.20

Source: ICE Data Services, VanEck. Fallen Angels: ICE US Fallen Angel High Yield 10% Constrained Index. Past performance is no guarantee of future results. Not a recommendation to buy or sell any of the names/securities mentioned herein. Index performance is not representative of strategy performance. It is not possible to invest in an index.

Rising Stars: FirstEnergy Corp. and Rolls-Royce exited the index in April after being part of the 2020 wave of COVID-related downgrades. FirstEnergy Corp. entered the index in November 2020 at $111.88 (a much higher price than some if its peers, as the energy sector had recovered from its large drawdown of May 2020), while Rolls-Royce entered the index in June 2020 at $96.67; both posted negative prices returns during their time in the fallen angel index. FirstEnergy was upgraded by Moody’s to Baa3 from Ba1, reflecting a much stronger financial profile due to actions take over the past few years. Rolls-Royce saw an upgrade from all three rating agencies in March. Moody’s upgraded to Ba1 from Ba2 due to improvement in credit ratios well ahead of expectations, S&P upgraded to BBB- from BB+ on a stronger than anticipated performance, which lead to meaningful deleveraging, and Fitch upgraded to BBB- from BB+, on confidence that Rolls-Royce will sustain solid financial metrics, which are already reflective of an investment-grade profile, supported by its strong business profile.

FebruaryLas Vegas Sands CorpBB1LeisureGaming3.1293.19
MarchEnlink Midstream Partners LPBB1EnergyGas Distribution2.3088.92
AprilFirstEnergy Corp.BB1UtilityElectric-Integrated6.6287.10
AprilRolls-Royce PLCBB1Capital GoodsAerospace/Defense1.5196.00

Source: ICE Data Services, VanEck. Fallen Angels: ICE US Fallen Angel High Yield 10% Constrained Index. Past performance is no guarantee of future results. Not a recommendation to buy or sell any of the names/securities mentioned herein. Index performance is not representative of strategy performance. It is not possible to invest in an index.

Fallen Angels Performance by Sector: Utility and Capital Goods exposures decreased with the two rising stars this past month. Utility exposure within fallen angels was significantly reduced in April with the exit of FirstEnergy (9% to approximately 2%), with the weight being redistributed among the other sectors. Retail, Energy and Real Estate gained more than 1% with Retail at an approximate 20% allocation, which is about 3.2x of the weight in the broad high yield market. Only four sectors saw spread widening, with Telecom being the major detractor. Relative to broad high yield, the top detractors from performance were Telecom and Retail, while the top contributors were the absence of Media and the selection effect within Consumer Goods sector, which was the only sector with a positive total return in the month (note that fallen angels only have one issuer, Newell Brands, within this sector while broad high yield has more than 40).

12/31/233/31/244/30/2412/31/233/31/244/30/2412/31/233/31/244/30/24MTD
Banking4.794.625.1323123521997.9197.1196.29-0.37
Basic Industry1.703.203.5517118615597.2494.3793.46-0.52
Capital Goods5.856.175.1020015315897.3497.3896.00-0.97
Consumer Goods4.334.424.9623022322994.2993.0793.140.62
Energy14.7511.1712.2525923522592.4993.9592.37-1.17
Financial Services1.141.181.2937833633286.4187.0984.75-2.17
Healthcare4.104.444.9027021018988.7390.8089.50-0.96
Insurance1.321.431.5532324423394.1096.8294.75-1.60
Leisure7.905.105.5622817016893.2195.0893.59-1.13
Real Estate9.079.6010.6567552751582.7281.8481.17-0.38
Retail14.3818.0219.5524217917286.3989.5487.58-1.82
Services0.640.660.7424321719594.7894.5193.53-0.58
Technology & Electronics6.225.816.2719418818594.1492.9990.44-2.27
Telecommunications13.0013.3914.0436636840192.2290.0184.66-5.20
Transportation2.092.232.4320917015194.9295.3794.20-0.80
Utility8.718.542.0413912216392.1891.1395.62-2.12
Total10010010028524725591.2091.2289.25-1.74

Source: ICE Data Services, VanEck. Returns are based on partial period data. Fallen Angels: ICE US Fallen Angel High Yield 10% Constrained Index. Not intended as a recommendation to invest or divest in any of the sectors mentioned herein. Index performance is not representative of strategy performance. It is not possible to invest in an index.

Fallen Angels Performance by Rating: There were no major changes with the rating exposure for fallen angels during the month. Higher quality outperformed lower quality, as only BB-rated bonds saw their spreads tighten (almost unchanged) while lower quality widened, but all posted negative price returns.

12/31/233/31/244/30/2412/31/233/31/244/30/2412/31/233/31/244/30/24MTD
BB80.5581.6380.4821919018892.4492.8591.72-1.14
B13.4312.8713.7931733034396.4693.9989.95-3.70
CCC5.445.515.731,13089398269.4068.4863.68-6.17
Total10010010028524725591.2091.2289.25-1.74

Source: ICE Data Services, VanEck. Fallen Angels: ICE US Fallen Angel High Yield 10% Constrained Index. Not intended as a recommendation to invest or divest in any of the sectors mentioned herein. Index performance is not representative of strategy performance. It is not possible to invest in an index. BB index: ICE BofA BB US High Yield Index; Single-B index: ICE BofA Single-B US High Yield Index; CCC & Lower rated index ICE BofA CCC & Lower US High Yield Index.

Originally published 17 May 2024. 

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Please note that VanEck may offer investments products that invest in the asset class(es) or industries included in thisblog.

This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third-party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.

A fallen angel bond is a bond that was initially given an investment-grade rating but has since been reduced to junk bondstatus.

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 ratedsecurities.

A rising star is a high yield bond that is upgraded to investmentgrade.

Duration is an estimate of how much the value of a bond portfolio would be affected by a change in prevailing interest rates. The longer a portfolio’s duration, the more sensitive it is to changes in interest rates.

There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer duration fixed-income securities and during periods when prevailing interest rates are low ornegative.

Index returns are not Fund returns and do not reflect any management fees or brokerage expenses. Certain indices may take into account withholding taxes. Investors cannot invest directly in theIndex.

ICE BofA US High Yield Index (H0A0, “Broad HY Index”), formerly known as BofA Merrill Lynch US High Yield Index prior to 10/23/2017, is comprised of below-investment grade corporate bonds (based on an average of various rating agencies) denominated in U.S.dollars.

ICE US Fallen Angel High Yield 10% Constrained Index (H0CF, “Fallen Angels Index”) is a subset of the ICE BofA US High Yield Index and includes securities that were rated investment grade at time ofissuance.

Fallen Angel U.S. High Yield index data on and prior to February 28, 2020 reflects that of the ICE BofA US Fallen Angel High Yield Index (H0FA). From February 28, 2020 forward, the Fallen Angel U.S. High Yield index data reflects that of the ICE US Fallen Angel High Yield 10% Constrained Index (H0CF). Fallen Angel U.S. High Yield index data history which includes periods prior to February 28, 2020 links H0FA and H0CF and is not intended for third partyuse.

ICE Data Indices, LLC and its affiliates (“ICE Data”) indices and related information, the name “ICE Data”, and related trademarks, are intellectual property licensed from ICE Data, and may not be copied, used, or distributed without ICE Data’s prior written approval. The licensee’s products have not been passed on as to their legality or suitability, and are not regulated, issued, endorsed, sold, guaranteed, or promoted by ICE Data. ICE Data MAKES NO WARRANTIES AND BEARS NO LIABILITY WITH RESPECT TO THE INDICES, ANY RELATED INFORMATION, ITS TRADEMARKS, OR THE PRODUCT(S) (INCLUDING WITHOUT LIMITATION, THEIR QUALITY, ACCURACY, SUITABILITY AND/OR COMPLETENESS).

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of futureresults.

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