PowerShares Utilizes Innovative Fixed Income ETF Approach

In an attempt to better serve the needs of investors and offer a different way to gain exposure to fixed income, Invesco PowerShares recently announced that it has renamed the PowerShares High Yield Corporate Bond Portfolio (PHB) to the PowerShares Fundamental High Yield Corporate Bond Portfolio. 

PHB will now seek to replicate and track the RAFI High Yield Bond Index, making it the first bond ETF to utilize a holdings methodology which is based on fundamentals, including book value, revenues, dividends and cash flow, to set constituent weights.  This approach differs from the traditional methodology of allocating the largest weights to the biggest debtors, which could potentially expose investors to enhanced risks of default. 

This new approach is expected to improve risk-adjusted returns because its weightings are based on fundamental measures of the resources available to service the respective debt, making it a unique way to play the high-yield fixed income arena.

PHB will normally invest at least 80% of its total assets in high-yield bonds that comprise the RAFI Index.  The six sectors that the ETF allocates the highest portion of its assets to are the following: 18% energy, 17.97% communications, 14.31% non-cyclical consumer, 12.12% financials, 11.7% consumer cyclical and 10.03% industrial. 

In regards to holdings, PHB’s top holdings include the debt of coal mining and producing giant Peabody Energy (BTU), power generation and utilities giant, AES Corp (AES), natural gas exploration and production company, Chesapeake Energy (CHK), alcoholic beverage producer Constellation Brands (STZ) and consumer products giant Jarden Corp (JAH).

Some other innovative fixed income ETFs that PowerShares offers include:

  • PowerShares Emerging Market Sovereign Debt Portfolio (PCY), which seeks to track potential returns of a theoretical portfolio of liquid emerging markets U.S. dollar-denominated government bonds issued by approximately 22 emerging-market countries.  Some top country allocations include the Philippines, Panama, Mexico, Brazil, Indonesia and South Korea.
  • PowerShares Build America Bond (BAB), which is designed to track the performance of U.S. dollar-denominated Build America Bonds publicly issued by U.S. states and territories and.

Disclosure: No Positions

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