Smart beta investing is well known in the equity space. Our research shows that it works for corporate bonds as well. This paper describes a smart beta strategy that efficiently provides exposure to investment grade corporate bonds denominated in major developed market currencies. The strategy crucially employs a portfolio construction methodology under which holdings are weighted without reference to the market value of constituent companies’ outstanding debt. Moreover, the strategy is designed to reduce volatility and improve credit quality by emphasizing companies with lower leverage, higher cash flow coverage of their debt, and lower downgrade risk. This paper also explains the reasoning behind key elements of the methodology and describes the simulated risk and return characteristics that emerge from back-testing the corporate bond strategy over a measurement period of 16 years.
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