Investing in Falling Angels Bonds

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Topic Author
Always passive
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Investing in Falling Angels Bonds

Post by Always passive »

My portfolio is 40% Global Equities, 5% Gold, and the rest in fixed income, a 10 year TIPS ladder (which I bought a few years ago when real returns were positive) and a sizeable amount in cash, mainly parked in short term TIPs ETF, VTIP)
I really do not need the cash for the conceivable future, and I really do not want to add to equities. So I have thought about investing some in falling angels bonds (it would be about 5% of my total portfolio.) I understand that they are below investment grade but also understand their attractiveness relative to junk bonds. Swedroe and others have written about it.
Any reason not to invest in them today? Does anyone hold them?
BTW, I am retired and live overseas, so I cannot invest in anything but ETFs or single stocks or bonds.
wmvink
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Re: Investing in Falling Angels Bonds

Post by wmvink »

After a lot of research (but still not enough - more on that later!) I landed on iShares Fallen Angels High Yield Corp Bond.

It seems that from a risk/reward perspective, fallen angel bonds occupy an interesting niche between junk bonds and treasuries. My research suggested they would perform well during the downturn that I was expecting.

That said, I realized too late it was considered a PFIC by the IRS, so earlier this year I decided to sell all of it. I would not have sold if it weren't for the draconian tax implications. Since you live overseas, I'm sure you're familiar with the pitfalls of PFICs, but when you say 'ETFs' I hope you mean US-listed ETFs because otherwise you might be in trouble.
Topic Author
Always passive
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Location: Israel

Re: Investing in Falling Angels Bonds

Post by Always passive »

wmvink wrote: Mon May 17, 2021 8:48 am After a lot of research (but still not enough - more on that later!) I landed on iShares Fallen Angels High Yield Corp Bond.

It seems that from a risk/reward perspective, fallen angel bonds occupy an interesting niche between junk bonds and treasuries. My research suggested they would perform well during the downturn that I was expecting.

That said, I realized too late it was considered a PFIC by the IRS, so earlier this year I decided to sell all of it. I would not have sold if it weren't for the draconian tax implications. Since you live overseas, I'm sure you're familiar with the pitfalls of PFICs, but when you say 'ETFs' I hope you mean US-listed ETFs because otherwise you might be in trouble.
Thank you for the information. I am a US citizen and all my investments are at Fidelity. I only invest in US based ETFs
alex_686
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Re: Investing in Falling Angels Bonds

Post by alex_686 »

Always passive wrote: Mon May 17, 2021 1:09 am Any reason not to invest in them today?
A solid reason not to invest is embedded in your name, Always Passive. Junk bonds are not well suited for passive investing. Their investable indexes are of poor quality. To be included in a investable price index you have to limit yourself to securities with high liquidity, and very few junk bonds have high liquidity. I have a modest portion of my holdings in junk bond funds, but they are all actively managed.

Also, a question. Why fallen angles? I think I know the studies and arguments you are relaying on. I will point out that these are suggestive and point to trends, relying on unstable underlying economic factors. It is like saying that on average men are taller than woman, and that taller people are better basketball players, and thus the average man is a better baseball player than a woman. This is generally statically true, but breaks down when looking at a particular person.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Topic Author
Always passive
Posts: 1267
Joined: Fri Apr 14, 2017 4:25 am
Location: Israel

Re: Investing in Falling Angels Bonds

Post by Always passive »

alex_686 wrote: Mon May 17, 2021 9:04 am
Always passive wrote: Mon May 17, 2021 1:09 am Any reason not to invest in them today?
A solid reason not to invest is embedded in your name, Always Passive. Junk bonds are not well suited for passive investing. Their investable indexes are of poor quality. To be included in a investable price index you have to limit yourself to securities with high liquidity, and very few junk bonds have high liquidity. I have a modest portion of my holdings in junk bond funds, but they are all actively managed.

Also, a question. Why fallen angles? I think I know the studies and arguments you are relaying on. I will point out that these are suggestive and point to trends, relying on unstable underlying economic factors. It is like saying that on average men are taller than woman, and that taller people are better basketball players, and thus the average man is a better baseball player than a woman. This is generally statically true, but breaks down when looking at a particular person.
My understanding is that significant managed money, specially institutional, does not allow the inclusion of sub investment grade bonds. Given that, once an investment grade bond fall below BBB, which happened in significant numbers in 2020, the managers are forced to sell no matter what, causing fallen angels to be undervalued. Swedroe and others have explained this much better than me.
alex_686
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Joined: Mon Feb 09, 2015 1:39 pm

Re: Investing in Falling Angels Bonds

Post by alex_686 »

Always passive wrote: Mon May 17, 2021 9:26 am My understanding is that significant managed money, specially institutional, does not allow the inclusion of sub investment grade bonds. Given that, once an investment grade bond fall below BBB, which happened in significant numbers in 2020, the managers are forced to sell no matter what, causing fallen angels to be undervalued. Swedroe and others have explained this much better than me.
This is true for all junk bonds. Both fallen angles (issued as investment grade, now fallen to speculative grade) and debt issued as speculative grade are barred from many portfolios. The yield and risk are similar.

There are short term tactics and active strategies that one can exploit when a bond is on the cusp. But we are talking about a time frame of days or weeks.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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