owerShares Fundamental Investment Grade Corporate Bond Portfolio (PFIG) began trading September 15. Based on the RAFI Investment Grade Bond Index, the fund will weight holdings by the issuer’s ability to service debt instead of the usual market cap method.
The Research Affiliates’ Fundamental Index (“RAFI”) methodology looks at four measures of company size: book value, sales, dividends, and cash flow. The goal is to sever the link between weight, price, and indebtedness. RAFI believes this overcomes some of the problems of cap-weighted indexes that place greater emphasis on firms issuing the most debt.
PFIG has just 31 holdings (complete list of holdings) with an anticipated yield of 2.5%, a modified duration of 4.9 years, and an expense ratio of 0.22%. Additional details are located in the overview, press release (pdf), and prospectus (pdf).
The new ETF faces formidable competition from SPDR Barclays Capital Issuer Scored Corporate Bond ETF (CBND), which launched in April. CBND holds 276 issues, has a current yield of about 3.5%, a modified adjusted duration of 5.9 years, and a 0.16% expense ratio.
PFIG joins PowerShares Fundamental High Yield Corporate Bond Portfolio (PHB) (PHB overview), which implemented a fundamental weighting strategy for its high yield bond portfolio in August 2010. Both funds are described further in Fundamental Index Fixed Income Portfolios (pdf).
Disclosure covering writer, editor, and publisher: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.