Invesco PowerShares has announced a shift in its high-yield corporate bond ETF that could have a big impact.
The PowerShares High Yield Corporate Bond Portfolio (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 (PHB). The ticker will remain the same.
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.
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.
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.
Tisha Guerrero contributed to this article.