Home etftrends.com Watch These Fallen Angel Sectors: Real Estate and Banking

Watch These Fallen Angel Sectors: Real Estate and Banking

By Nicolas Fonseca, CFA, Product Manager

Real Estate and Banking continue to be the sectors to watch going forward. May 2024 ends with no new fallen angels or rising stars.

In May, 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 0.13% (1.01% vs 1.14%). Fallen angels now lag by 0.79% YTD, with returns of 0.85% vs 1.64% for the broad high yield market. Within broad high yield, BB and CCC and below rated bonds posted the same return, 1.23%, while single B rated bonds underperformed by 0.27%, posting 0.96% in May. Lower quality high yield continues to be ahead so far this year due to much higher yields (average yields of 13.5%, to date), as well as a shorter duration, which translated into a -0.87% price return and 3.68% income return for the CCC and lower rated bonds. Fallen angel spreads are still tight, currently at 260bps, which is 2bps below the YTD average, 31bps below the 3Y average and 102bps below the 10Y average, but 60bps above the lowest all time spread, which occurred in October 2021, at 200bps.

Fallen Angel Spreads Over Various Time Periods

Source: ICE Data Services, VanEck. Past performance is no guarantee of future results.

Where are Fallen Angels sectors relative to Broad HY now?

Fallen angels deliver a distinct value proposition that sets them apart from the overall high yield market. Fallen angels generally have differentiated sector exposure, which has been one of the drivers of long-term outperformance as these issuers tend to have sector biases as a result of broad economic factors (for example, going overweight Autos in 2004/2005 and Energy in 2016, the COVID pandemic and what is now playing out in the Real Estate sector). Historically this has allowed investors to participate in an entire sector’s recovery, as bonds may be oversold prior to downgrade and subsequently recover in price.

The table below details the current positioning of fallen angels vs broad high yield.

  • Fallen angels have a more distinct sector exposure than broad high yield, which has helped drive prior differentiated returns. Banking and Real Estate are indicative, as fallen angels are overweight 6.7x and 3.3x, respectively, and both offer wider spreads (3bps and 249bps wider) and higher yields (33bps and 245bps). The lack of Auto and Media exposure in fallen angels differs from broad high yield, as the latter has approximately 11% combined exposure to both sectors.
  • All fallen angels sectors have a longer duration than high yield which investors can take advantage of when rate cuts occur to avoid or limit reinvestment risk while still maintaining caution on excessive duration risk.
Automotive*Underweight
BankingOverweightWiderHigherLonger
Basic IndustryUnderweightTighterLowerLonger
Capital GoodsUnderweightTighterLowerLonger
Consumer GoodsOverweightTighterLowerLonger
EnergyOverweightWiderLowerLonger
Financial ServicesUnderweightWiderHigherLonger
HealthcareUnderweightTighterLowerLonger
InsuranceUnderweightTighterLowerLonger
LeisureUnderweightTighterLowerLonger
Media*Underweight
Real EstateOverweightWiderHigherLonger
RetailOverweightTighterLowerLonger
ServicesUnderweightTighterLowerLonger
Technology & ElectronicsOverweightTighterLowerLonger
TelecommunicationsOverweightTighterLowerLonger
TransportationOverweightTighterLowerLonger
UtilityUnderweightTighterLowerLonger

*No fallen angel exposure. As of 5/31/24.

Source: ICE Data Services, VanEck.

Fallen Angels Overall Statistics: Fallen angel yields decreased by 13bps to 7.30% while spreads continue to trade rangebound in the mid-200s. Broad high yield saw similar changes, with yields decreasing 16bps but still above 8.00% and spreads experiencing minimal changes, as the 10Y rallied with yields falling approximately 20bps due to slightly better inflation data and strong earnings. With no fallen angel or rising star activity this past month, the change in duration was muted.

12/31/233/31/244/30/245/31/2412/31/233/31/244/30/245/31/24
Yield to Worst6.996.927.437.307.697.758.208.04
Par Weighted Price91.2091.2289.2589.7391.8693.1891.8892.54
Effective Duration5.415.325.205.133.313.283.363.32
Full Market Value ($mn)67,82164,65757,95555,9541,237,7211,260,5421,245,9721,266,219
OAS285247255260339315318320
No. of Issues1431381301291,8371,8641,8641,881

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.

Fallen Angels: There were no fallen angels in May but we continue to keep an eye on real estate exposure, as early June saw Moody’s put six regional banks on review for downgrades due to their substantial exposure to commercial real estate loans, particularly in office space. Boeing continues to be on our radar as all three rating agencies rated it BBB-/Baa3 with a negative watch/outlook.

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: None in May.

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: All sectors, except for Real Estate, posted positive returns in May, with Transportation and Insurance being the top performers, although their contribution to return was limited due to their small exposures. Real Estate and Telecom were bottom performers, as both were the only sectors to see their price decline in May. These sectors have the lowest average price, highest spreads and among the highest weightings (approximately 22%) within fallen angels. Relative to broad high yield, fallen angels’ Retail and Banking sectors were top contributors to performance due to their overweights, while Real Estate was the main detractor to performance due to its high weighting and wider spreads, with most issuers in the index exposed to commercial real estate.

12/31/233/31/244/30/245/31/2412/31/233/31/244/30/245/31/2412/31/233/31/244/30/245/31/24MTD
Banking4.794.625.135.4023123521920897.9197.1196.2997.371.54
Basic Industry1.703.203.553.7117118615515097.2494.3793.4694.671.69
Capital Goods5.856.175.105.3620015315817197.3497.3896.0096.961.45
Consumer Goods4.334.424.965.2023022322922894.2993.0793.1493.801.24
Energy14.7511.1712.2512.0225923522523492.4993.9592.3792.961.34
Financial Services1.141.181.291.3637833633234186.4187.0984.7585.861.79
Healthcare4.104.444.905.0827021018920088.7390.8089.5090.361.37
Insurance1.321.431.551.6432324423322794.1096.8294.7596.071.89
Leisure7.905.105.565.8222817016816993.2195.0893.5994.341.22
Real Estate9.079.6010.6510.8467552751559382.7281.8481.1779.66-1.43
Retail14.3818.0219.5520.3524217917217486.3989.5487.5888.591.48
Services0.640.660.740.7824321719519494.7894.5193.5394.471.41
Technology & Electronics6.225.816.276.5319418818519094.1492.9990.4491.511.60
Telecommunications13.0013.3914.0411.2236636840139792.2290.0184.6683.320.46
Transportation2.092.232.432.5520917015114394.9295.3794.2095.651.95
Utility8.718.542.042.1413912216316992.1891.1395.6296.331.20
Total10010010010028524725526091.2091.2289.2589.731.01

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: No major changes within the rating exposure for fallen angels this past month, with BBs still at an 80% exposure. Higher quality within fallen angels outperformed lower quality, as lower quality spreads widened and their prices declined.

12/31/233/31/244/30/245/31/2412/31/233/31/244/30/245/31/2412/31/233/31/244/30/245/31/24MTD
BB80.5581.6380.4883.2321919018819392.4492.8591.7292.491.29
B13.4312.8713.7911.0531733034336196.4693.9989.9590.330.60
CCC5.445.515.735.721,1308939821,03469.4068.4863.6861.98-1.89
Total10010010010028524725526091.2091.2289.2589.731.01

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 June 2024. 

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

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 bond status.

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.

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

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 or negative.

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 the Index.

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 of issuance.

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 party use.

ICE BofA US High Yield (BB): ICE BofA US High Yield (BB) Index is comprised of below-investment grade corporate bonds with BB ratings (based on an average of various rating agencies) 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 U.S. or a Western European nation.

ICE BofA US High Yield (Single-B): ICE BofA US High Yield (Single-B) Index is comprised of below-investment grade corporate bonds with single-B ratings (based on an average of various rating agencies) 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 U.S. or a Western European nation.

ICE BofA US High Yield (CCC & Lower): ICE BofA US High Yield (CCC & Lower) Index is comprised of below-investment grade corporate bonds with ratings of CCC or below (based on an average of various rating agencies) 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 U.S. or a Western European nation.

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