The provider of exchange-traded funds is offering investors exposure to the “fallen angel” phenomenon occurring in the fixed income industry.

Invesco PowerShares has listed the PowerShares US High Yield Fallen Angels UCITS ETF on the London Stock Exchange.

“Fallen angel” bonds are bonds that were rated investment-grade before being downgraded to high-yield.

The exchange-traded fund will target bonds with a minimum rating of C by Standard & Poor's and Ca by Moody’s, and a maximum rating of BB+ by Standard & Poor's and Ba1 by Moody’s. It 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.

The index’s time-weighting function allocates higher weights to bonds that have more recently become “fallen angels”. Issuers’ weights are capped at 5 per cent and constituents’ time-based weights are capped at five times their respective market value-based weights to help manage concentration risk.

Eligible bonds will be held in the index for a period of 60 months provided they continue to meet the criteria. If a bond exits and then re-enters the index, the inclusion period would reset, Invesco said in a statement.

Invesco PowerShares plans to list the ETF on the following exchanges in September, subject to regulatory approval: Irish Stock Exchange, Borsa Italiana, Deutsche Börse, Euronext Paris and SIX Swiss Exchange.

“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,” said Bryon Lake, head of Invesco PowerShares in the Europe, Middle East and Africa. 

“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.”