There’s a corner of the bond market that’s often overlooked by investors, and its bonds are doing well right now. These bonds are called “Fallen Angels,” and are bonds that have recently been downgraded from investment grade to high yield. There are only two exchange-traded funds investing in this space: iShares Fallen Angels USD Bond ETF (FALN) and VanEck Fallen Angel High Yield Bond ETF (ANGL). The former has a 30-day SEC yield of 7.18% and the latter has a 30-day SEC yield of 6.87%. When a bond is no longer rated investment grade by rating agencies such as Moody’s or Standard & Poor’s, many institutional investors are forced to sell the bond. This creates an imbalance between supply and demand, which in the short term will cause prices to fall, explained Morningstar Manager Research Analyst Zachary Evans.In fact, bonds included in the Bloomberg Barclays U.S. High Yield Fallen Angel 3% Capped Index are priced at an average of 150 basis points below other high-yield bonds, according to a 2019 report from the Chartered Alternative Investment Analysts Association. This could be an opportunity for investors. “As supply and demand rebalance over time, that gap will narrow, helping these bonds outperform in the meantime,” Evans said. Tracking Outperformance Both FALN and ANG are part of Bank of America’s Dynamic Prudent Yield strategy, which the bank describes as bonds with high exposure to the real economy and low exposure to inflation and interest rate risk. According to Bank of America, the strategy has better backtested absolute and risk-adjusted returns. As a group, the Prudent Yield Sector ETFs have outperformed the U.S. Aggregate Bond Index by an average of 3.5% and U.S. Treasuries by an average of 9.3% this year, analyst Jared Woodard said in a Monday note. Notably, Fallen Angels is trading 3.2% above its 10-month moving average, he said. FALN 1Y Mountain iShares Fallen Angels USD Bond ETF 1-Year Performance The iShares Fallen Angels USD Bond ETF and VanEck Fallen Angel High Yield Bond ETF track two different indexes. ANGL seeks to replicate the ICE US Fallen Angel High Yield 10% Constrained Index, while FALN tracks the Bloomberg Barclays US High Yield Fallen Angel 3% Capped Index.”[FALN] “Fallen angels have traditionally outperformed high-yield and investment-grade bonds over the long term,” said Steven Rapley, global co-head of iShares Fixed Income ETFs at BlackRock. Historical data shows that the Bloomberg Barclays U.S. High Yield Fallen Angel 3% Capped Index has returned 7.25% annualized over the past 10 years as of March 31, according to BlackRock. By comparison, the Bloomberg U.S. High Yield Index has returned 4.64% annualized over the past 10 years, the company said. Investment-grade bonds, as represented by the Bloomberg U.S. Corporate Bond Index, have returned 2.85% annualized over the past 10 years. Beware the risks Morningstar’s Evens said that fallen angel portfolios are generally of much higher quality than high-yield bonds. About 70% of the bonds are rated BB, just below investment-grade. In the high-yield category, about 45% of the bonds are rated BB, he said. But Rapley noted that there is a risk of further downgrades. “If they are initially downgraded, it could be that the fundamentals of the company continue to deteriorate,” he said. Conversely, about 25% of fallen angels will return to investment grade over time, Rapley noted. These bonds typically have a longer duration than high-yield bonds, which could mean interest rate risk. FALN’s duration is currently 4.88 years, while the iShares Broad USD High Yield Corporate Bond ETF (USHY) has an effective duration of 3.33 years (as of March 31). That said, duration and quality are not as critical to overall performance and risk, Evans said. Rather, it’s market dynamics and short-term price crashes and subsequent price rallies that really affect the overall performance of funds in this category, he added. “Historically, performance has been pretty volatile, despite being of higher credit quality than high-yield bonds,” Evans said, noting that volatility leans more toward low-volatility stock funds than core bond funds. “Compared to other bond funds, they are definitely much riskier and more likely to give investors unwanted surprises during market corrections,” he added. For example, Evans said fallen angel funds fell more than core bond funds and high-yield bonds in general in 2020. So rather than allocating a large amount to fallen angels, he suggests making a smaller allocation to give your portfolio a little more juice.
Fallen Angel ETF outperforms with 7% yield, but comes with risks
Services
© 2026 Business Investopedia. All Rights Reserved.