The Fed’s move into high yield, which no central bank has done before, is part of a wider plan to support global markets that have been struggling following the rapid spread of coronavirus.
As part of the US central bank’s “unlimited” quantitative easing measures, it will purchase bonds that have recently been downgraded from BBB- or above to BB-/Ba3 before 22 March.
This announcement, which came on 9 April, leaves fallen angel ETFs in a sweet spot as they offer exposure to this segment of the market. For example, the $60m Invesco US High Yield Fallen Angels UCITS ETF (HYFA) has 26.6% in BB+, 28.8% in BB and 27.9% in BB-, as of 14 April.
Following the Fed announcement, HYFA, which is the only ETF in Europe to be entirely exposed to the US dollar-denominated bonds in the US and Canada, rallied 6.1%.
Despite the news, however, traders did not pile into fallen angel ETFs in an attempt to front-run the Fed’s purchases.
The $355m iShares Fallen Angels High Yield Corp Bond UCITS ETF (WING), Europe’s largest fallen angel ETF, saw inflows of just $4.9m over the past week, while the VanEck Vectors Global Fallen Angel High Yield Bond UCITS ETF (GFA) saw $490,000 inflows, according to data from Bloomberg. HYFA saw flat flows.
Instead, they turned to the far larger high yield market with major US ETFs such as the SPDR Barclays High Yield Bond ETF (JNK) attracting $506m inflows over the past week.
However, there a number of tailwinds supporting fallen angel ETFs. As well as the Fed’s purchases, HYFA, which has a 35% weighting to the energy sector, will benefit from OPEC+’s agreement to cut global oil production by 15m barrels per day last week.
The cut has gone some way in stabilising global oil prices which have risen from lows of $24.7 a barrel earlier this month.
Paul Syms, head of EMEA ETF fixed income product management at Invesco, added high yield has not yet caught up with the investment-grade market due to ongoing concerns of further downgrades.
Highlighting this, HYFA is still down 14.8% year-to-date while the iShares USD Corp Bond UCITS ETF (LQDS), one of Europe’s largest fixed income ETFs, has rallied to post positive YTD returns of 8%.
“Fallen angel ETFs will be the main beneficiaries of the Fed’s recent purchases,” Syms continued. “The central bank stepping in, combined with the oil supply cut, leaves the asset class in a sweet spot.”
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