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.
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.
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.