Invesco PowerShares, with the help of Research Affiliates, claims to have just created the first fixed-income tracking a fundamentally-weighted index. Today the Chicago-based ETF specialist switched the PowerShares High Yield Corporate Bond Portfolio from tracking the WellsFargo High Yield Bond Index to the RAFI High Yield Bond Index. (The fund has also been rebranded as the PowerShares Fundamental High Yield Corporate Bond Portfolio.)
Ed McRedmond Invesco PowerShares Senior Vice President, Portfolio Strategies
The ETF, first launched on November 15, 2007, boasted $220 million at market close on Friday, a PowerShares spokesman confirmed.
Ed McRedmond, senior vice president of portfolio strategies at PowerShares, confirmed that PowerShares continues to partner with Wells Fargo for another product. As for Research Affiliates, McRedmond noted that PowerShares and Research Affiliates have worked together for about four years, first launching an ETF together in December 2005.
"This is the first fundamental index fixed-income ETF that's out there," McRedmond told The MFWire. "We're very excited to bring something unique to the marketplace again."
McRedmond described the fund's change as a response to feedback from advisors and institutional investors over the problems with conventional fixed income indexes, especially high yield ones.
"In the high yield space, there's always some challenges," McRedmond said, describing those traditional those challenges as a "problem of index construction methodology."
Rob Arnott, chairman and founder of Research Affiliates, described his index as "a compelling alternative to traditional high-yield bond indexes" by using "the highest liquidity, creditworthiness, investability and interest rate risk balance for a high-yield index today."
"Traditional bond indexes are flawed," Arnott stated. "Why would you want to give the biggest portion of assets to those companies that are the biggest debtors?"
Research Affiliates launched the RAFI High Yield Bond Index on January 1, 2010.
Company Press Release
Chicago – August 2, 2010 – Invesco PowerShares, a leading provider of exchange-traded funds (ETFs), announced that effective Aug. 2, 2010, the PowerShares High Yield Corporate Bond Portfolio (PHB) began tracking the RAFI® High Yield Bond Index and was renamed the PowerShares Fundamental High Yield® Corporate Bond Portfolio. PHB is the first fixed-income ETF to use Research Affiliates’ Fundamental Index methodology.
“We are very pleased to expand our relationship with Research Affiliates and offer investors another industry first with the introduction of an innovative fixed-income index strategy that incorporates the Fundamental Index methodology,” said Ben Fulton, Invesco PowerShares managing director of global ETFs. Invesco PowerShares already offers eight equity ETFs based on FTSE RAFI indexes, which also make use of the Fundamental Index methodology.
Traditional bond indices 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.
“By weighting companies based on fundamental measures of their resources available to service debt, we believe the PowerShares Fundamental High Yield Corporate Bond Portfolio represents a compelling alternative to market-cap-weighted fixed-income portfolios and provides investors the potential for improved risk-adjusted returns,” Mr. Fulton added.
“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.” Ron Ryan, CEO of Ryan ALM, adds, "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."
PHB will normally invest at least 80% of its total assets in high-yield bonds that comprise the Index. The Index 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 underlying index is rebalanced at the end of every month based on the index rules and weighted according to a composite RAFI weight that is calculated for each eligible company. Composite RAFI weights are calculated using the following four factors: current book value of assets as well as gross sales, gross dividends and cash flow, each based on five-year averages. The target RAFI weights are reconstituted annually.
The Fund previously tracked the WellsFargo® High Yield Bond Index. The fund continues to be offered on the NYSE Arca under the existing ticker symbol PHB.
Invesco PowerShares Capital Management LLC is leading the Intelligent ETF Revolution® through its family of more than 120 domestic and international exchange-traded funds, which seek to outperform traditional benchmark indexes while providing advisors and investors access to an innovative array of focused investment opportunities. With franchise assets over $44 billion as of June 30, 2010, PowerShares ETFs trade on both U.S. stock exchanges. For more information, please visit us at www.invescopowershares.com.
Invesco PowerShares is part of Invesco Ltd., a leading independent global investment manager, dedicated to helping investors worldwide achieve their financial objectives. By delivering the combined power of our distinctive investment management capabilities, Invesco provides a wide range of investment strategies and vehicles to our retail, institutional and high net worth clients around the world. Operating in 20 countries, the company is listed on the New York Stock Exchange under the symbol IVZ. Additional information is available at www.invesco.com.
There are risks involved with investing in ETFs including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks. For a description of the risks of investing in the Funds, please see the Funds’ prospectuses. Ordinary brokerage commissions apply.
High-yield securities have additional risks, including interest-rate changes, decreased market liquidity and a larger amount of outstanding debt than investment-grade securities.
Foreign securities have additional risks, including exchange-rate changes, decreased market liquidity, political instability and taxation by foreign governments.
The Fund’s underlying securities may be subject to call risk, which may result in the Fund having to reinvest the proceeds at lower interest rates, resulting in a decline in the Fund’s income.
The Fund may invest in illiquid securities, resulting in a decline of the Fund’s returns.
The Fund is considered non-diversified and may be subject to greater risks than a diversified fund.
Not FDIC Insured | May Lose Value | No Bank Guarantee
Note: Not all products available through all firms.
PowerShares® is a registered trademark of Invesco PowerShares Capital Management LLC (Invesco PowerShares). Invesco PowerShares Capital Management LLC and Invesco Distributors, Inc. are indirect, wholly owned subsidiaries of Invesco Ltd.
Fundamental Index®, Research Affiliates®, Fundamental High Yield® and all other RA trademarks, trade names, patented and patent‐pending concepts are the exclusive property of Research Affiliates, LLC. The RAFI US High Yield Bond Index is calculated and maintained by ALM Research Solutions, Inc. (a wholly owned subsidiary of Ryan ALM, Inc.) in conjunction with Research Affiliates, LLC and is the exclusive property of Research Affiliates.
Shares are not individually redeemable and owners of the Shares may acquire those Shares from the Funds and tender those Shares for redemption to the Funds in Creation Unit aggregations only, typically consisting of 100,000 Shares.
Invesco Distributors, Inc. is the distributor of the PowerShares Exchange-Traded Fund Trust II.
An investor should consider the Fund’s investment objective, risks, charges and expenses. For this and more complete information about the Fund, call 800 983 0903 or visit invescopowershares.com for a prospectus. Please read the prospectus carefully before investing.
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