These Bonds Could Outperform Following Rate Cuts
Fallen angel funds sit in an interesting middle ground for fixed-income allocators: they are still high yield, but they start from a more creditworthy issuer base than many other junk bond segments. That matters when the macro backdrop shifts from tightening to easing, because investors are not only betting on rates. They are also implicitly weighing whether weaker financing conditions can stabilize issuers that have already been downgraded.
For ETF readers, the more durable question is not whether rate cuts help bonds in general, but which bond sleeve best balances yield, credit risk and reinvestment risk. Fallen angel exposure can offer a distinct mix of income and issuer quality, yet it remains vulnerable if the slowdown that accompanies cuts is deeper than markets expect. In that sense, the allocation case depends on whether an investor wants credit spread exposure with a higher-quality starting point than broad junk.
Index construction also matters. A fallen angel strategy is defined by the path a bond took into high yield, not just its current rating. That ruleset creates a portfolio with sector tilts that may differ meaningfully from a broad high-yield benchmark. Investors should treat that as a feature, but also as a source of concentration risk: performance can hinge on a relatively small number of issuers, industries or refinancing outcomes.
Finally, this kind of ETF is best evaluated as a portfolio building block rather than a substitute for core bonds. Its role is usually tactical or satellite, where the investor is comfortable with more spread volatility in exchange for a differentiated source of income. The key discipline is to size it alongside other fixed-income sleeves, instead of assuming a rate-cut thesis removes credit risk.
ANGL Matters Now
Prior to 2022, interest rates were low for prolonged periods of time. That means the number of legitimate easing cycles since the start of this century is low. To be precise, itโs two. One commenced in September 2007 and another in August 2019. However, that history, albeit limited, bodes well for ANGL. โFallen angels outperformed broad high yield over various time periods following the first rate reduction (see chart below), with spreads widening over the following months after the first cut as the economy experienced a slowdown/recession,โย noted Nicolas Fonseca, product manager at VanEck. โNote that those cuts occurred under varying economic and market conditions. But we believe that in the current cycle, the higher quality and differentiated sector exposure may be drivers of outperformance going forward, as they have in the past.โBetter Risk-Adjusted Bet
Over the past three years โ a period including the start of the Fedโs tightening cycle โ ANGL was more volatile than the Bloomberg U.S. Aggregate Bond Index (โthe Agg). Thatโs not surprising. But ANGL was the better risk-adjusted bet over that period, gaining 2.4% while the Agg slid 5.7%. Another example of fallen angelsโ favorable history is that these bonds tend to outperform in the period following the last rate hike leading up to the first cut. That was the case in 2007 and 2019. โIn both cases, fallen angels outperformed by an average of 0.80%. From the last hike to the first cut (June 2006 to September 2007 and December 2018 to August 2019), both strategies posted double-digit returns. [Fallen angels led] by 0.71% on average,โ added Fonseca. โIn contrast, from the last hike to the last cut (June 2006 to December 2008 and December 2018 to March 2020), broad high yield posted negative returns in both periods.ย [Fallen angels] achieved positive returns in the latter period.โEnjoyed this article? Sign up for our newsletter to receive regular insights and stay connected.