Invesco PowerShares is today listing a “fallen angels” ETF on the London Stock Exchange focused on US high-yield bonds with further listings across Europe to launch next week.
Fallen angels are bonds that have been downgraded from investment grade to high yield.
The PowerShares US High Yield Fallen Angels Ucits ETF will include bonds with a maximum rating of BB+ by S&P and Ba1 by Moody’s to be eligible and a minimum rating of C by S&P and Ca by Moody’s.
The ETF Citi tracks the Time-Weighted US Fallen Angel Bond Select index, which is based on the Citi US High-Yield Market index.
It listed on the Irish Stock Exchange on Friday.
Head of Invesco PowerShares for EMEA Bryon Lake says several elements help push the bond price of fallen angels down.
“First leading up to the downgrade you tend to see prices begin to drop as investors position themselves for the downgrade. Secondly, after the downgrade there are large asset owners, usually institutional in nature, that are forced to sell what were investment grade bonds but are now high yield due to their strict mandated rules.
“This forced selling creates a phenomenon where the bond can become oversold, which creates an opportunity to buy the bonds at their existing market value. This overselling – more often than not – is followed by a rebound in the bonds prices, potentially creating a unique opportunity and in a number of instances the bond even returns to investment grade.”
Lake says fallen angel bonds will be included in the index for a period of 60 months following their downgrade, as long as they continue to meet the inclusion criteria. The inclusion period resets if a bond exits and then re-enters the index.
“There is a design element to the index that differentiates this ETF from other such investments,” says Lake.
“By using a time-weighted methodology the index emphasises the bonds that were most recently downgraded, which is logical in the context of a ‘fallen angel’ strategy versus say market cap weighting, and also could enhance the return of the ETF by more acutely capturing the ‘fallen angel’ phenomenon.”
The ETF will launch on the Borsa Italiana, Deutsche Börse, and Euronext Paris next Wednesday and the SIX Swiss Exchange next Friday.