IShares Fallen Angels USD Bond ETF is a small ETF worth keeping on your radar. It offers low-cost, broad market-value-weighted exposure to fallen angels, which represent an attractive area of the high-yield market. Fallen angels are bonds that were investment-grade when they were first issued, but their quality has since slipped below investment-grade.
Fallen angels are more likely to be undervalued than original-issue high-yield bonds when they first fall below investment-grade. That's because there's considerable forced selling pressure when these bonds are downgraded below investment-grade, as a lot of investment-grade investors aren't permitted to own lower-quality bonds. This fund is refreshed monthly, which allows it to quickly pick up these bonds after they fall below investment-grade and benefit from the potential mispricing from this forced selling pressure.
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Alex Bryan does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.