Invesco PowerShares is expanding its smart beta range of exchange-traded funds (ETFs) by launching a US high-yield fund focusing on ‘fallen angels’.
Referring to companies whose credit rating has been downgraded from investment grade to high yield, the fund will buy companies after such changes, and hold them for five years.
The PowerShares US High Yield Fallen Angels Ucits ETF will track the Citi Time-Weighted US Fallen Angel Bond Select index. It is based on Citigroup’s US high-yield benchmark, but weights positions according to how recently a stock has been downgraded instead of according to market capitalisation.
Bryon Lake, head of Invesco PowerShares, said factors such as forced selling push down the price of a company’s bond in the event of a downgrade, creating an opportunity to buy an oversold instrument.
He said: “This is often followed by a rebound in bond prices, potentially creating a unique opportunity. By using a time-weighted methodology, the index emphasises the bonds that were most recently downgraded, which could enhance the return of the ETF by capturing the ‘fallen angel’ phenomenon.”
The ETF launches on the London Stock Exchange on September 5 and will have a total expense ratio of 0.45 per cent.
Mr Lake said he expected the strategy to offer “more upside” than traditional high yield, with the firm seeing the product as an alternative to investors’ existing junk bond exposures.
“I think of this as more the value segment of equities. It’s a good way to get exposure,” he added.