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'Fallen angel' ETFs bet big on further energy renaissance

By Trevor Hunnicutt

NEW YORK, July 7 (Reuters) - The top-performing high-yield bond exchange-traded fund is betting big that energy companies will not be deadbeats.

The $212 million VanEck Vectors Fallen Angel High Yield Bond Exchange Traded Fund is winning its category this year by focusing almost exclusively on particular low-rated bonds: so-called fallen angels, or downgraded bonds that used to be investment grade but have since fallen from grace.

The fund, which is outperforming the largest broad high-yield debt competitor over three years as well, was able to sidestep the rout in oil and gas company debt that accompanied the 74 percent drop in crude prices between June 2014 and Feb. 11, when oil bottomed out at $26.05 a barrel.

During that long oil price slide, ANGL lost 8.2 percent while the iShares iBoxx $ High Yield Corporate Bond ETF dropped 13.2 percent.

Now with energy companies dominating the fallen angels list, ANGL is betting more on that sector than HYG or most other broad high-yield (also called junk bond) competitors. ANGL's 25 percent energy exposure is more than double iShares iBoxx $ High Yield Corporate Bond ETF's 12 percent weighting.

"It's a recovery trade," said Matthew Tucker, head of iShares Americas fixed-income strategy at BlackRock Inc, which launched its own fallen angels ETF last month. The iShares Fallen Angels USD Bond ETF has a 28 percent energy weighting.

Oil's rebound this year - U.S. crude traded above $45 on Thursday - has already helped energy debt. ANGL has leapt 21 percent since Feb 11. It is up 16.5 percent so far this year, while its category is up 6.9 percent, Lipper said.

Yet it is not a risk-free trade. The oil-price rebound has not cured the energy sector's problems. Fitch Ratings Inc pegs the 12-month U.S. high-yield energy default rate at 15 percent in June and expects the number to rise to 20 percent this year.

Furthermore, the ANGL fund is more interest rate-sensitive than its competitors. Should rates rise by 1 percent, it could drive a 5 percent decline for ANGL, according to data service FactSet Research Systems Inc.

Likewise, ANGL's bonds - higher-grade than HYG's - are more likely to lose value if spreads between U.S. Treasuries and junk bond yields widen, FactSet statistics showed.

The reverse is true - the bonds could rocket up more in favorable markets. If rising rates signal an improving economy, it will be easier for energy firms to repay debts, VanEck portfolio manager Fran Rodilosso said.

(Editing by Matthew Lewis)