Bold Bets: 3 Distressed Debt ETFs for High-Return Potential


  • Here are three distressed ETFs to buy now.
  • VanEck Fallen Angel High Yield Bond ETF (ANGL): The best name of the bunch, it finds value in distressed debt.  
  • SPDR Bloomberg High Yield Bond ETF (JNK): The largest of the ETFs by net assets, you won’t find it much cheaper than where it trades today.  
  • Invesco Fundamental High Yield Corporate Bond ETF (PHB): This ETF is the smallest but might be the best of the bunch. 
distressed debt ETFs - Bold Bets: 3 Distressed Debt ETFs for High-Return Potential

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If you haven’t heard, distressed debt remains popular with hedge funds. Bloomberg recently profiled a new UK fund that’s raised more than $500 million to invest. Founded by two former Deutsche Bank colleagues, it got me thinking about distressed debt ETFs for retail investors to buy to wade into distressed debt. 

A global corporate debt storm could be brewing with interest rates much higher than two years ago. According to corporate bankruptcy lawyer Richard Cooper, large corporate bankruptcies are at the second-fastest pace since the financial crisis in 2008.

Cooper points out that there is already $500 billion in distressed debt worldwide, with plenty more to come. According to Bloomberg, $168 billion of the more than $590 billion in corporate bonds and loans trading at distressed levels are in the real estate industry.

That’s hardly surprising when large companies like Brookfield Asset Management (NYSE:BAM) default on their Los Angeles office properties. Other industries with high levels include healthcare ($63 billion) and telecommunications ($63 billion).  

While there are losers in distressed debt, there are also winners. These three distressed debt ETFs try to be on the winning side of the equation.     

VanEck Fallen Angel High Yield Bond ETF (ANGL)

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Of the three names I’ve selected, the VanEck Fallen Angel High Yield Bond ETF (NASDAQ:ANGL) has a fund name that at least sounds somewhat distressed. The ETF seeks to track the performance of the ICE US Fallen Angel High Yield 10% Constrained Index. This is a collection of below-investment-grade corporate bonds issued in USD, in the United States domestic market, and initially investment grade.

“Fallen angel bonds provide a distinct value proposition that sets them apart from the broad high yield market. The distinction between the high yield bond market and the much larger investment grade market, with unique investor bases and issuers, creates a structural inefficiency when a bond crosses over from one category to the other,” states the VanEck website. 

Since 2004 through December 2022, the Fallen Anglel index (up 346%) has outperformed both the Morningstar High-Yield Bond Average (141%) and the ICE BofAML High Yield Index (209%). 

As VanEck says, the fallen angel bonds tend to be from larger companies. ANGL has 163 holdings. Companies whose bonds are in the top 10 include Newell Brands (NASDAQ:NWL), Rolls-Royce Holdings (OTCMKTS:RYCEY), and Las Vegas Sands (NYSE:LVS). 

Throughout the past 10 years, it has had an annualized total return of 6.0%. While that’s not earth-shattering, it is a nice defensive play when equity markets aren’t cooperating. 

SPDR Bloomberg High Yield Bond ETF (JNK)

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The SPDR Bloomberg High Yield Bond ETF (NYSEARCA:JNK) tracks the performance of the Bloomberg High Yield Very Liquid Index. This is a collection of USD denominated high-yield corporate bonds with above-average liquidity. 

The maturities of the corporate bonds held in the index range from a minimum of one year to a maximum of 15. Those included in the index have a Standard and Poor’s rating of BB+ or lower. It has an outstanding face value of at least $500 million. 

The ETF charges a reasonable 0.40% yearly, or $40 per $10,000 invested. JNK currently has 1,172 holdings invested in $7.3 billion in net assets. The average maturity is 5.02 years, with an average coupon of 6.08%. The trailing 12-month distribution yield is a healthy 6.66%. 

The top three bonds by sector weight are consumer cyclical (22.90%), communications (15.68%), and consumer non-cyclical (12.55%). The top three companies whose bonds are held in the ETF include TransDigm Group (NYSE:TDG), Dish Network (NASDAQ:DISH), and Caesars Entertainment (NASDAQ:CZR).

It is trading at one of its lowest levels since the financial crisis of 2008. As a result buying JNK is a bet that its share price has bottomed and will move back into the $100s throughout the next 24-36 months. 

Invesco Fundamental High Yield Corporate Bond ETF (PHB)

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The Invesco Fundamental High Yield Corporate Bond ETF (NYSEARCA:PHB) tracks the performance of the RAFI Bonds US High Yield 1-10 Index. RAFI stands for Research Affiliates Fundamental Indexing. Research Affiliates’ smart beta and asset allocation investment strategies are used in more than $130 billion in assets worldwide. 

The index includes corporate bonds that are U.S.-dollar-denominated and issued by companies based in the U.S. 

The bonds must have a fixed coupon rate and a minimum of $350 million in face value outstanding. Rebalanced monthly, the index removes any bond whose face value is below $350 million at month’s end. When selected, the bonds must be rated Ba1/BB+ or lower by either Moody’s or Standard & Poor’s. 

The companies selected for the index are scored on four factors. Five five-year average gross sales, gross dividends, and gross cash flow are three factors. The fourth factor is the current book value of the assets. Private firms are not included because they only use data from U.S. public companies, unlike JNK, which does. 

The ETF’s top three sectors by weight are consumer discretionary (27.31%), industrials (13.69%), and materials (10.28%). Approximately 52.5% of the ETF’s $522.7 million net assets are invested in corporate bonds with 1-5 year maturities, while 44.3% are in 5-10-year maturities. The remaining 3.2% are maturities of less than one year. That’s where the 1-10 comes from in the index’s name. 

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.




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