Invesco PowerShares has announced a shift in its high-yield corporate bond exchange traded fund (ETF) that could have a big impact.
The PowerShares High Yield Corporate Bond Portfolio (NYSEArca: PHB) has changed its underlying index and is now tracking the RAFI® High Yield Bond Index. It’s also been renamed the PowerShares Fundamental High Yield Corporate Bond Portfolio (NYSEarca: PHB). The ticker will remain the same. [Are Junk Bonds Worth a Look?]
This is the first fixed-income ETF to use Research Affiliates’ Fundamental Index methodology. The provider already offers eight equity ETFs based on FTSE RAFI indexes, which also makes use of the Fundamental Index methodology. [How to Cope with a Bond Bubble.]
The shift was made because of some flaws in traditional bond indexes: they 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. [ETFs: It’s What’s Inside That Counts.]
It’s important to bear in mind that while this new index may reduce risk in the fund, it’s still a high-yield bond ETF and these companies still carry the risk of default. Use with care and understanding, and have a strategy in place before you buy. [How to Follow Trends.]
For more stories about bond ETFs, visit out Bond ETF category.
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.