RODILOSSO: Yes, that is right. It has a higher sensitivity to movement in credit spreads but this is an investment grade Index. So credit spreads are not as volatile as they might be in, for example, a high yield index. If you look at one of the larger issues in the Index as an example, a four year JPMorgan Floating Rate Note [FRN] has more credit risk than a one-year FRN in the sense that its credit spread might move. However, the default risk for the JPMorgan FRN, whether you’re on a one year or four year is the same.
KEMMERER: To summarize both of these points, Ed, tell us how ANGL and FLTR really typify the way VanEck rolls out products.
LOPEZ: I would wrap it up as just intelligent design. What I mean by this is that we try to identify what the outcome we’re trying to solve for. And then we also look at the marketplace and how would an investor actually approach that market? It may not be a just a cap weight approach like an academic might. It might be, as we talked about with FLTR, looking at where you might be able to source higher yield. What does that do to the risk-return parameters of the portfolio? Looking at liquidity parameters, size, exposure, different things. We try to approach it like an investor might. The result is, some might refer to that as smart beta. I just refer to it as just smart investing.
KEMMERER: That’s a great note to end on. Gentlemen, thank you so much for taking the time to tell us more about VanEck and the rising interest rate environment.
The VanEck Vectors Fallen Angel ETF (ANGL) and the VanEck Vectors Investment-Grade Floating Rate ETF (FLTR) provide various benefits, as we discussed earlier. However, they also provide an additional benefit—diversification.
Investment-grade bonds and long-dated Treasuries have a correlation of +0.83. Meanwhile, FLTR and corporate investment-grade bonds have a low correlation of +0.16. ANGL also has a lower correlation.
Since interest rates are about to rise more, you should consider reducing the duration of your portfolio by investing in low-duration ETFs like FLTR. You can take on credit risk using ANGL. ANGL invests in high-quality high-yield bonds, which used to be investment-grade bonds.