PowerShares Announces Change to High Yield Corporate Bond ETF

Earlier this week, ETF giant PowerShares announced a change in indexes for its popular High Yield Corporate Bond Fund (PHB). The fund will now track the RAFI High Yield Bond Index which 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 fund will now go by the name PowerShares Fundamental High Yield Corporate Bond Fund and maintain the same ticker symbol. PHB is now the first fundamentally weighted bond fund by using the increasingly popular RAFI methodology which puts a premium on the ability of a fund to pay back bond interest as opposed to using a cap weighted system which tends to focus on the heaviest issuers of debt which are often the riskiest companies. “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.” said Ron Ryan, CEO of Ryan ALM who helped to develop the new index. The new index looks to focus more on the top echelon of junk-rated bonds allocating roughly 40% to ‘BB’ and ‘B’ rated securities compared to the old index which had just 20% in these securities. The difference is even more striking when comparing the allocations that the indexes made to securities rated ‘CCC’ or lower; 60% of the old index went to these high risk securities compared to a zero percent weighting in the new index. “Traditional bond indexes are flawed. Why would you want to give the biggest portion of assets to those companies that are the biggest debtors?” said Rob Arnott, chairman and founder of Research Affiliates, LLC, which developed the new index in conjunction with Ryan ALM, Inc. “The RAFI High Yield Bond Index offers a compelling alternative to traditional high-yield bond indexes.”... Read more

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