RAFI Bonds

RAFI bond indices use a transparent rules-based methodology to weight bonds using economic measures of company or country size and are thus tilted toward higher credit-quality firms or countries with lower risk of downgrade or default.

AT A GLANCE

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Emphasizes debt-service capacity

Icon_Capitalizes_on_Inefficiencies

Capitalizes on observable inefficiencies

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Focuses on implementation

RAFI Bonds strategies sever the link between debt and weight.

RAFI Bond indices are based on a transparent rules-based methodology that weights bonds using economic measures of company or country size. The results are indices correlated with debt service capacity—tilted toward higher credit-quality firms or countries with lower risk of downgrade or default.

Reduces potential overexposure to lower-quality firms or countries.

Traditional bond indices, which are weighted by the amount of debt outstanding, may not always be optimal for passive solutions. In traditional indices, the most indebted issuers receive the largest index weights. Weighting according to the debt appetite of bond issuers can leave investors overexposed to firms with poor credit quality, without compensation for the added risk they take on.

Thoughtfully designed to deliver for investors

Emphasizes debt-service capacity

Fundamental measures are used to sever the link between outstanding debt and portfolio weight. This approach avoids overexposure to companies or countries with high debt burdens, resulting in higher credit quality and improved risk-adjusted returns.

Capitalizes on observable inefficiencies

RAFI Bonds utilizes a systematic rebalancing process that takes advantage of mean reversion in credit spreads—buying bonds that are inexpensive and selling bonds that have increased in price. By taking advantage of value opportunities, the portfolio seeks to deliver higher returns.

Benefits the investor

The beneficial attributes of passive indexing—namely, low cost, transparent, rules based, and highly implementable—are preserved.

RAFI Bonds Strategies

RAFI Bonds US Corporate
 

An index series that weights a company’s debt according to fundamental measures of a firm’s debt-service capacity—book value of assets, gross sales, gross dividends, and cash flow—rather than the amount of debt outstanding.

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FTSE RAFI World Corporate Investment Grade Bond

An index series that weights a company’s debt according to fundamental measures of a company’s debt-service capacity—namely, long-term assets and cash flow—instead of the amount of debt outstanding.

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FTSE RAFI Sovereign Bond
 

An index series that weights a country’s debt instruments according to fundamental measures of a country’s size relative to the world economy—specifically, GDP, population, energy consumption, and rescales land area—rather than amount of debt outstanding.

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Index Documents

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Smart Beta For Corporate Bonds: Efficient Access to Premium Returns
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How should investors gain access to the return premia offered by the bond markets? Traditional options have largely been limited to passive market-value-weighted index exposures and actively managed bond funds. Both have drawbacks.

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Does it make sense to weight companies by how much debt they issue? Weighting according to fundamental measures results in a higher quality index with a more efficient exposure to the beta available in the credit markets.