Fallen Angels vs. Hedged High Yield — Bond ETF Smackdown!

Three bond ETFs walk into portfolio. One's chasing downgraded debt. Another one is hedging interest rate risk like it's 2022. And yet another is a ho-hum corporate type. And that's what we have on today's ETF battles.

Today's audience requested a triple header between these three bond ETFs. Couldn't be more different. And yet they all claim a seat at the fixed income table. So which is the optimal choice? Stick around for the answer.

You're watching ETF Battles. I'm Ronda Lee. Great to see you again. If it's your first time joining us, welcome to our community. Be sure to hit that subscribe button and don't forget to participate with your comments as well as your ETF battle requests. Give us your ticker symbols in the comment section below. Be sure to check out our season 6 playlist to make sure that your desired matchup has not already been done.

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So today's ETF contest was requested by a viewer named The Great O 360 and it's a bond matchup between BlackRock, VanEck, and Vanguard. All of these ETFs are very different bond strategies behind them. And to help you just appreciate how long this viewer has been thinking about today's ETF battle, they actually did an edited request from an original post that was over two years ago. Wow, that's some serious deliberation, not to be confused with procrastination. Thank you, O 360, the great O 360 for today's ETF contest. Your deliberation is about to be rewarded.

Joining us, we've got a dual extraordinaire. We've got Tony Dong, an independent ETF analyst, and Shaina Sisle with Banrion Capital. Great to see both of you again. Welcome back to ETF Battles.

So, we got our four battle categories: Cost, exposure, strategy, performance, and yield are combined. And then we got our mystery category where you, our judges, can pick whatever criterion or factor that you feel is crucial to today's contest. Our judges can also nominate wild card ETFs or they can opt for split decisions. I've got scorekeeping duties. At the end of the program, we will declare an overall winner. Keep in mind that none of the battle outcomes on this program are ever predetermined or known in advance by myself or our judges. So, let's kick things off with the first category. It's sisters before misters. Cost is the first category. Shaina, please get us started.

So, I'm going to do something I don't normally do here, which is I might give the winner to the one that doesn't have the lowest expense ratio. Let me explain. So, if we do it solely on expense ratio and trading spread, it goes to Vanguard with three basis points, a spread of 1 cent, and over 40 billion in assets under management. Vanguard is clearly the cheapest. However, I am going to give the win to VanEck's Fallen Angel ETF. And the reason why is it's ETF expense ratio is 25 basis points, similar spread 1 cent.

But the reason I'm giving it to VanEck is the Vanguard fund is a passively managed fund, plain vanilla, and playing in the investment grade short duration kind of space. It should have a very low expense ratio. I'm more impressed with VanEck being able to have a 25 basis point expense ratio and the type of tradability that it has on a fund that's actively managed that's incorporating a fairly differentiated approach to how this fund is managed. So while it is not necessarily the cheapest of the three, it is still extremely inexpensive for the management you're getting and the style of the fund. So I don't normally do that but in this case I feel very strongly that it stands out for its ability to provide the type of strategy it is providing at the cost that it is providing to the market. So for me it's a...

Great counterintuitive thinking and analysis. You don't always get what you pay for, sometimes you pay for what you get. Thank you Shaina. Tony you're up next. How do you see it when it comes to cost?

Shaina's right. Angel compared to FALN which is the other fallen angels high yield bond fund is significantly cheaper than dual 25 bips for what it does in a fairly illiquid section of the high yield market is competitive. I am more literal. I see three basis points for VCSH and I hit buy because if you're looking for a substitute that delivers a yield pickup over say a short-term treasury fund at a three basis point drag, this is among the cheapest options. And it's worth noting that this used to cost four basis points. Vanguard recently lowered the fee by one basis point on VCSH and a total of actually 168 share classes across 87 funds. So this was part of their widespread fee cuts that just went into place. So, some of you are looking at Vanguard funds and you haven't seen them in a while. Well, like VCSH, they've gotten cheaper recently.

So, your pick is... VCSH.

All right. So, that takes us next to the exposure category. Tony, you're still up. So, break it down for us. How do these three ETFs compare?

Three totally different strategies. The easiest one to understand is VCSH. You're looking at investment grade corporate bonds. So, tripleB and higher ratings with a weighted average maturity of 1 to 5 years. In practice, this translates into pretty minimal interest rate risk. You got a 2.7 year duration. So, this one is going to move more with the short end of the yield curve. And of course, staying investment grade in your corporate bond exposure means you get a yield pickup over treasuries, but not so much as high yield short-term bonds. So, right now, you know, this is kind of like your I want to keep my cash somewhat safe, but earn a little more than what I can get from say a money market fund.

HYGH is the interesting one. So this ETF actually holds HYG as one of its underlying which is iShar's like big liquid high yield bond that is particularly suitable for traders but it complements this with a allocation to interest rate swaps and what that does is that that mitigates a lot of the losses from rising rate years like 2022 but you lose the potential upside from years where interest rates fall. So if you think about it from a total return perspective you're basically taking the interest rate interaction with bonds out of that. So it's more to do with coupon clipping at this point.

And then AMGL is all about fallen angels. So these are previously investment grade bonds that have since been downgraded. And the theory there is that you know on the you catch them on the rebound from a total return perspective. There's a theoretically a better risk and return trade-off. But again when you package it into ETF it all depends on execution. So when I think about how these exposures are, you know, suitable as in like an overall best for investors, I would go with A&GL because it's it's it's a very well-executed access to a segment of the market that is traditionally excluded from a lot of the bonds that investors especially on the retail side will hold, which is an aggregate strategy. If you have an aggregate strategy like BND or AG, you are going to own the kind of stuff in VCSH. Whereas for HYGH, I'm not really a fan of the use of swaps. I don't like to hedge out certain types of risk. I think you're compensated for that. You know, it's more of a timing issue. In 2022, it really didn't work well, which is why HYGH has done better than just HYG unhedged. Whereas for A&GL, you have a rare opportunity, like Shaina mentioned, to get what is traditionally a fairly inaccessible part of the high yield market and one that has better risk and return characteristics for in in a liquid, accessible, and cheap vehicle. So on the exposure angle, I would go with A&GL.

Got it. Shaina, you're up next. How do you see it when it comes to exposure strategy?

So I'll start with the headline. I agree with Tony. A&GL is my winner in this category as well. You know, just to dive a little bit deeper into some of the things that Tony already mentioned. VCSH the Vanguard fund is passively managed focused on low one to five-year maturity corporate bonds. So unlike a traditional short short-term fixed income product that includes governments and corporates this is just in the corporate sector which allows it to have a little bit better yield.

I really dislike HYGH. I think Tony was very diplomatic about what he said. My feedback on it is this is a fund that you would only be interested in if it was a rising rate environment. And even then, when rates rise, you're usually compensated in some way through the yield and the coupons of high yield for that. So while there might be a short-term dislocation and some volatility, overall it kind of evens itself out over time. I would not want to get into the game of trying to choose when I should own this fund. In fact, when I was doing my research on the fund, one of the first articles that came up is how much money has moved out of this product in the last 12 months because it is really just when rates are rising. It's hedging interest rates, but the only time that's an advantage is if rates are going up, not when they're going down. That's actually the environment you want the interest rate exposure. And so I don't like it. Like Tony said, it uses swaps. That...