PowerShares Rolls Out 2nd RAFI Bond ETF

September 15, 2011

PowerShares adds another RAFI-based bond fund to its lineup.

Invesco PowerShares, the money management firm behind the $22 billion “Q’s” Nasdaq 100 ETF, today launched a corporate bond ETF, making it the 17th fund from the Wheaton, Ill.-based company that uses an index from Rob Arnott’s fundamental indexing firm Research Associates.

The PowerShares Fundamental Investment Grade Corporate Bond Portfolio (NYSEArca: PFIG) joins PowerShares’ other fundamental fixed-income offering using a RAFI index, the PowerShares Fundamental High Yield Corporate Bond Portfolio (NYSEArca: PHB). PHB has gathered $523 million in nearly four years.

PFIG also joins State Street Global Advisors’ own fundamentally weighted bond fund, the SPDR Barclays Capital Issuer Scored Corporate Bond ETF (NYSEArca: CBND). PowerShares’ PFIG comes with an annual expense ratio of 0.22 percent, compared with 0.16 percent for SSgA’s CBND and 0.50 percent for PHB.

PFIG forgoes traditional market-cap weighting for Arnott’s fundamental methodology that screens for book value, cash flow, revenue and dividends to focus on an issuer’s ability to service debt rather than owning debt issued by the biggest debtors. The fund includes bonds with maturities ranging from one to 10 years—the bulk being in the five- to 10-year range. It issues monthly distributions.

“We believe the PFIG represents an attractive alternative to market-cap-weighted fixed-income portfolios and provides investors the potential for improved risk-adjusted returns,” Ben Fulton, managing director of global ETFs for Invesco PowerShares, said in a press release.

Enhanced Beta, A Growing Trend?

PFIG belongs to a growing number of so-called enhanced beta ETFs designed to protect investors from the impact of market mispricing while generating risk-adjusted returns. PFIG will reset weights in the portfolio annually.

Research Affiliates’ approach “severs the link between weight, price and indebtedness, thereby reducing the potential for return drag inherent in cap-weighted indexes,” PowerShares said in its press release.

By contrast, a market-cap-weighted strategy bets on the biggest bond issuers, assigning the most weight to those that owe the most.

MSCI, widely considered the preeminent provider of international indexes, released research recently on the benefits and affordability of developing broad investment strategies based on indexes that isolate “risk premia” rather than relying on the old-fashioned acumen of stock and bond pickers and their research teams.


Find your next ETF

Reset All