For wealth managers who think that weighting portfolios based on research fundamentals, rather than how high the underlying companies' market cap is, could be a plus for performance, then you may want to look into a change in the PowerShares High Yield Corporate Bond Portfolio (PHB). The ETF will now track Research Affiliates' RAFI High Yield Bond Index--and it will be the first bond ETF to track a RAFI index, according to an announcement on Monday, August 2. The ETF had been tracking the WellsFargo High Yield Bond Index. This represents a real shift in philosophy for the fund.
The ETF began tracking the new index on August 2. It has been renamed the PowerShares Fundamental High Yield Corporate Bond Portfolio--but its symbol, PHB, remains the same.
The RAFI indexes are from Research Affiliates, LLC, known for founder Rob Arnott's long-term tracking and research into how cap-weighted indexes perform, versus how indexes that are weighted with fundamental factors perform. The fundamental index uses the five-year average of these four classic company fundamentals: "current book value of assets as well as gross sales, gross dividends and cash flow, according to the news release." The target RAFI weights are reconstituted annually. The index is rebalanced monthly.
"Traditional bond indexes are flawed. Why would you want to give the biggest portion of assets to those companies that are the biggest debtors?" Arnott asked in the release. "The RAFI High Yield Bond Index offers a compelling alternative to traditional high-yield bond indexes." Research Affiliates worked with Ryan ALM, Inc. to create the 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," Ben Fulton, Invesco PowerShares managing director of global ETFs stated in the release. PowerShares carries eight equity ETFs that track RAFI fundamental indexes.
Find out more about how fundamental indexes work:
Comments? Please send them to email@example.com. Kate McBride is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.