Invesco PowerShares, a leading global provider of exchange-traded funds (ETFs), part of Invesco, has listed the PowerShares US High Yield Fallen Angels UCITS ETF on London Stock Exchange, and on additional European stock exchanges.
The PowerShares US High Yield Fallen Angels UCITS ETF tracks the Citi Time-Weighted US Fallen Angel Bond Select Index, which is based on the Citi US High-Yield Market Index, with the same composition requirements around credit quality, maturity, and issue size. Bonds must have a minimum rating of C by S&P and Ca by Moody’s, and a maximum rating of BB+ by S&P and Ba1 by Moody’s to be eligible.
“Fallen angels” bonds which were previously rated investment-grade but were subsequently downgraded to high-yield are eligible for inclusion in the index and will be held in the index for a period of 60 months from inclusion provided they continue to meet the inclusion criteria. If a bond exits and then re-enters the index, the inclusion period would reset.
Bryon Lake, Head of Invesco PowerShares – EMEA, says: “With the ‘fallen angel’ phenomenon there are two things going on that are pushing the bond price 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 continues: “In addition, because Invesco PowerShares is focused on being a leader in the smart beta space, there is a design element to the index that differentiates this ETF from other such investments. 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 vs say market cap weighting, and also could enhance the return of the ETF by more acutely capturing the ‘fallen angel’ phenomenon.”
Unlike traditional indices, where constituent weights are based on market value, the Citi Time-Weighted US Fallen Angel Bond Select Index aims to capture the price dynamics over the potential rebound period by using a time-weighting function that allocates higher weights to bonds that have more recently become ”fallen angels.” Issuers’ weights are capped at 5% and constituents’ time-based weights are capped at five times their respective market value-based weights to help manage concentration risk.
Arom Pathammavong, Global Head of Citi Fixed Income Indices, commented: “Leveraging insights from Citi’s research teams, we continue to expand our family of indices in order to offer market participants unique opportunities to meet diversification needs and further enhance their portfolios. For the Citi Time-Weighted US Fallen Angel Bond Select Index, we examined the price movements of fallen angel bonds which showed that prices of these bonds tend to recover from the dip of the downgrade over a 30-60 month period. The index will hold these fallen angel bonds for up to 60 months while applying an innovative time-based weighting methodology that aims to capture the price rebound effect of these bonds.”
The ETF has also been listed on the Irish Stock Exchange, the Borsa Italiana, the Deutsche Börse, the Euronext Paris, and the SIX Swiss Exchange.