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Why Have Fallen Angels Outperformed Broad High Yield Bonds?

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What is the average credit quality of fallen angel bonds, and how is that significant?

About 75% of fallen angel bonds (ANGL) were rated BB as of May 31, 2016. Original-issue investment-grade bond issuers tend to be larger, more well-established companies than original issue high yield bond issuers, of which only about 50% are BB-rated.

Data as of March 31, 2016. Please click the “Disclosures” link at the beginning of this article for descriptions of the indices referenced in this chart.

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The difference can be significant for high yield bond investors who may want to ratchet up their average credit quality when concerned that the broad market could enter into a period of higher volatility. BB-rated bonds have tended to endure market volatility better than single-B or triple-C rated bonds on average.

Data as of March 31, 2016. Past performance is no guarantee of future performance. Index performance is not illustrative of fund performance. Please click the “Disclosures” link at the beginning of this article for descriptions of the indices referenced in this chart. Fund performance current to the most recent month end is available by visiting www.vaneck.com/etfs.

Talk about the risk-adjusted returns for fallen angels. They are often higher than other high yield bond indices. What are the characteristics of the bonds that give these kinds of returns?

Relative to the broad high-yield bond (HYG)(JNK) market, fallen angels have historically averaged higher absolute and risk-adjusted returns, over extended periods of time. That is, they have historically had higher total returns for the level volatility investors have experienced. We believe that the combination of higher average credit quality and the value play in buying recent fallen angels explains the overall attractive risk-adjusted performance.

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