The PowerShares US High Yield Fallen Angels Ucits ETF tracks the Citi Time-Weighted US Fallen Angel Bond Select Index.
Fallen angels were previously rated investment-grade but have been downgraded to high yield.
The 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.
Provided they continue to meet the inclusion criteria, the fallen angels will be held for a period of 60 months. If a bond exits and then re-enters the index, the inclusion period would be reset.
Invesco PowerShares plans to list the ETF across other European stock exchanges in the near future.
Pushing bond prices down
Bryon Lake, head of Invesco PowerShares - EMEA, said: “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.”
Arom Pathammavong, global head of Citi Fixed Income Indices, said: “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 to 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.”