In what could signal a new trend in the bond ETF marketplace, Invesco PowerShares revamped one of its bond ETFs to follow a fundamentally weighted bond index.
The Wheaton, IL-based investment firm changed both the name and the index for PowerShares High Yield Corporate Bond Portfolio (NYSEArca: PHB). The ETF was renamed the PowerShares Fundamental High Yield Corporate Bond Portfolio and its underlying index was switched to the RAFI High Yield Bond Index. The changes became effective on August 2.
PHB is the first fixed income ETF to use Research Affiliates’ Fundamental Index methodology.
Traditional bond indexes give the largest weights to the biggest debtors, potentially exposing investors to greater risks of default. In contrast, Research Affiliates’ Fundamental Index methodology uses fundamental measures of company size, including book value, sales, dividends and cash flow, to set constituent weights.
“The RAFI High Yield Bond Index offers a compelling alternative to traditional high-yield bond indexes.” Ron Ryan, CEO of Ryan ALM, adds, “We believe the index rules that we designed and maintain for the RAFI Index provide the highest liquidity, creditworthiness, investability and interest rate risk balance for a high-yield index today.”
Invesco PowerShares already offers eight equity ETFs based on FTSE RAFI indexes, which also make use of the Fundamental Index methodology. Previously, PHB tracked the WellsFargo High Yield Bond Index.
“By weighting companies based on fundamental measures of their resources available to service debt, we believe the PowerShares Fundamental High Yield Corporate Bond Portfolio represents a compelling alternative to market-cap-weighted fixed-income portfolios and provides investors the potential for improved risk-adjusted returns,” added Ben Fulton, Invesco PowerShares managing director of global ETFs.
PHB will normally invest at least 80% of its total assets in high-yield bonds that comprise the index. The index measures potential returns of a theoretical portfolio of high yield, U.S. dollar denominated corporate bonds registered for sale in the United States whose issuers are public companies listed on a major U.S. stock exchange.
The underlying index is rebalanced at the end of every month based on the index rules and weighted according to a composite RAFI weight that is calculated for each eligible company. Composite RAFI weights are calculated using the following four factors: current book value of assets as well as gross sales, gross dividends and cash flow, each based on five-year averages. The target RAFI weights are reconstituted annually.
The fund’s ticker symbol and annual expense ratio of 0.50% remain unchanged.
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