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How This ETF is Avoiding Some Controversial Fallen Angels

This article was originally published on ETFTrends.com.

Shares of California utility PG&E Corp. lost more than half their value last week after company said it could seek Chapter 11 bankruptcy protection as soon as this month due to facing liabilities of up to $30 billion related to California wildfires in 2017 and 2018.

Predictably, ratings agencies lowered ratings on PG&E bonds, taking the company from BBB- to a highly speculative C rating, meaning PG&E corporate bonds fit the definition of fallen angels. Fallen angels are those corporate bonds born with investment-grade ratings that are later downgraded to junk.

Home to nearly $848 million in assets under management, the VanEck Fallen Angel High Yield Bond ETF (ANGL) is the dominant exchange traded funds providing access to fallen angels. ANGL tracks the ICE BofAML US Fallen Angel High Yield Index (H0FA), “which is comprised of below investment grade corporate bonds denominated in U.S. dollars, issued in the U.S. domestic market and that were rated investment grade at the time of issuance,” according to VanEck.

Investors should not expect to see PG&E bonds on ANGL's roster anytime soon.

“Also on January 15, ICE BofAML announced that, although the bankruptcy filing date would fall after the preview date for its high yield indexes, PG&E’s bonds would NOT be added to the ICE BofAML high yield indexes, including the US High Yield Index or the US Fallen Angel High Yield Index,” said VanEck in a recent note.

What's Next

PG&E is the largest investor-owned utility in California and has 16 million customers across the state. Speculation has been swirling that the company's bankruptcy overture is a play to force California to bail the company out.

For now, it appears ANGL's index provider is exercising prudence in excluding PG&E debt.

“We believe the indexer has exercised discretion with regard to the index rules in a thoughtful and prudent manner,” said VanEck. “That is not to say the bonds in question are certain to fall further in value, that PG&E investors have been saved from losses, or that the bonds cannot rally from here. Markets are quick to price in bad news, and the reorganization of PG&E could, under reasonable assumptions, leave a high recovery value for the bonds.”

ANGL holds 225 bonds, about 91% of which rated are BB or B.

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