Anglo-Russian issuer FinEx has launched a new ETF on Moscow Exchange that seeks to capture the risk premia associated with ‘fallen angel’ bonds.
Oleg Yankelev, CEO of AMC FinEx Plus.
Linked to the Solactive USD Fallen Angel Issuer Capped Index, the FinEx Fallen Angels UCITS ETF (FXFA RM) invests in corporate bonds that have recently been downgraded from investment grade to high yield while belonging to the BB+ to BB- rating segment.
This segment of the market has seen a dramatic expansion following the market turmoil in 2020 wrought by Covid-19 with billions of dollars worth of corporate bonds re-classified from investment grade to high yield during the height of the crisis.
These bonds, which were once rated investment grade but are now rated high yield, are known as fallen angels.
Since these bonds have recently lost their prestigious investment-grade status, they have often been the subject of disinvestment pressure originating from institutional investors such as pension funds and endowments that are no longer permitted to hold them.
As a consequence of this disinvestment pressure and associated negative sentiment, over-selling can arise presenting an opportunity for investors in these bonds who may benefit from higher expected risk-adjusted total returns.
Oleg Yankelev, CEO of AMC FinEx Plus in Russia, said: The FinEx Fallen Angel UCITS ETF is an exciting opportunity to make a smart move among the global search for yield. This segment of high yield bond market is exactly where many investors want to be – equity-like returns with fixed income risks.”
Index methodology
The fund’s underlying index aims to track the performance of bonds that recently have been downgraded into the upper periphery of the high-yield market (rating between BB+ and BB-).
It includes liquid USD-denominated bonds with a time to maturity of at least one year. Index components must also have a minimum amount outstanding of at least $400 million and must have been downgraded from investment grade to the high yield within the last five years.
Constituents are weighted by market capitalization of debt outstanding subject to a weight cap of 8% per issuer to limit concentration in larger issuers. The excess weight of constituents exceeding the 8% cap is redistributed proportionally to all other issuers.
The index, which currently has 28 constituents, is rebalanced semi-annually. Major positions presently include bonds issued by Ford Motor Credit Company, Apache Corp, Time Warner Cable, Newell Brands, and Cenovus Energy.
Timo Pfeiffer, Chief Markets Officer at Solactive, said: “As the indexed fixed income market matures, index strategies underpinning passive funds become more sophisticated. The FinEx Fallen Angel UCITS ETF is a prime example of a passive strategy exploiting a structural characteristic deeply embedded in the fixed income market previously captured by mostly active investors.”
The fund is physically replicating and comes with a TER of 0.60%. It is domiciled in Ireland and trades in USD.