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PowerShares launches US High Yield Fallen Angels UCITS ETF


Invesco PowerShares is launching a new smart beta ETF in Europe – the PowerShares US High Yield Fallen Angels UCITS ETF – bringing a Fallen Angel fixed income product to their existing equity heavy offering.

Bryon Lake, head of Invesco PowerShares EMEA, explains that the firm is the fourth largest provider of ETFs globally, with USD110 billion under management globally, and focuses on the smart beta segment of the ETF sector exclusively. 

“That’s the ultimate focus for the business and where we really thrive,” Lake says. The European part of the business has been growing steadily and its S&P 500 High Dividend and Low Volatility ETF has been the second fastest growing ETF over the last two years.
Year to date, Lake says that PowerShares has had 10 per cent of all smart beta etf flows in EMEA and he believes that investors are increasingly  looking to PowerShares to deliver smart beta solutions in their portfolios. The firm has also established a partnership with the Cass Business School, commissioning four white papers on the smart beta theme, with the intention of using an educational focus for investors.
There is also a new report due, based on research PowerShares has conducted interviewing CIOs an portfolio managers within the institutional investor community across Europe.
Within Europe, the number of ETF products available number 20 and some have a seven year track record but the last two years has seen rapid growth for the firm, with six new launches and now the seventh, the PowerShares High Yield Fallen Angel ETF.
“We are strong in the equity space and now we are stepping into the fixed income space,” Lake says. “It’s a fantastic opportunity and clients have significant interest in smart beta fixed income strategies.”
However, turning to fixed income presented a number of challenges. “There have been decades of research on smart beta and risk premia on the equity side,” Lake says, “but because of the nature of bonds and fixed income there is not that much data available.”
The result of PowerShares research is an ETF investing in fallen angels, bonds that have been downgraded from investment grade to the high yield space. Because institutional investors often have to own only investment grade bonds, these ‘fallen angels’ are discarded, despite their innate value.
“Because of forced selling from institutions of downgraded bonds you see a V-shaped recovery out of that,” Lake says. “The significant price appreciation offers a similar yield from a fallen angel portfolio as a traditional high yield portfolio and tends to be a higher investment grade because bonds tend to just dip at the higher end when they are downgraded. I equate it to a value segment within equities.”
Beyond the V-shaped recovery, Lake explains that the PowerShares Fallen Angel ETF will have a further feature. “Another point to note is the design element of the ETF, which means that we will overweight the most recently downgraded bonds in the portfolio to maximise the effect of that recovery in the portfolio.” The first two months of recovery for a downgraded bond sees the steepest part of the recovery and that can continue for 24 months to some extent.
The new product is based entirely on US bonds and as the investment manager is buying when everybody else is selling, it is pretty liquid. Charges are set at 45 bps.
Lake says: “I believe investors will use this three ways: some investors will get the point quickly and simply replace their existing high yield holdings with our ETF; others will split the ticket between their existing high yield holdings and our ETF, and the third group is investors who really like the idea and own it as a tactical satellite investment in their portfolio.”

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