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FinEx unveils fallen angels ETF

Fallen angels outperformed traditional bonds in 2020 but fewer downgrades may soften pandemic tailwinds

Jamie Gordon

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FinEx ETF has launched a fallen angels product to appeal to investors seeking diversification outside of traditional fixed income.

The FinEx Fallen Angels UCITS ETF (FXFA) has listed on the Moscow Stock Exchange with a total expense ratio (TER) of 0.60%. 

Tracking the Solactive USD Fallen Angel Issuer Capped index, FXFA offers exposure to bonds that have been downgraded from investment grade to high yield junk bonds.  

Rebalanced semi-annually, the index features 28 US dollar-denominated constituents with a BB+ to BB- rating including Ford Motor Company and Time Warner Cable.  

Each bond issuer makes up no more than 8% of the index, must have a minimum outstanding amount of at least $400m and must have been downgraded within the last five years. 

Having lost investment-grade status, these bonds are no longer suitable for pension funds but outperformed other fixed income classes in 2020. For instance, the Bloomberg Barclays US HY Fallen Angel 3% Cap Total Return index rose by almost 48% between March and December last year. 

“As the indexed fixed income market matures, index strategies underpinning passive funds become more sophisticated,” Timo Pfeiffer (pictured), chief markets officer at Solactive, said. 

“FXFA 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.” 

Oleg Yankelev, CEO of AMC FinEx Plus in Russia, added: “FXFA is an exciting opportunity to make a smart move among the global search for yield.”  

Like most bond vehicles, fallen angels will be hampered by rates and any sharper-than-expected inflation spikes. However, BlackRock’s fallen angels product has been its fourth most popular bond ETF among US investors year-to-date, so it would appear investors still favour this asset class as a source for fixed income alpha.

One area of potential concern may be the prospect of fewer issuer downgrades in 2021. With cyclical equities taking a beating during the initial pandemic volatility, the volume of downgrades acted as a tailwind for the returns of fallen angels. This pace is likely to slow as the cyclicals recovery sits front and centre during the return to normality.

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