Market cap weighting has long been the traditional strategy for not only ETFs, but almost all basket funds. But as the ETF industry expanded, many have realized the benefits of alternative weighting strategies as a number of them outdid their cap-weighted counterparts. More recently these strategies have waded into fixed income territory and yielded several interesting bond ETF products:
- SPDR Barclays Capital Issuer Scored Corporate Bond ETF (CBND) – This ETF uses three fundamental factors to determine the weight given to each debt it holds: return on assets, interest coverage, and current ratio.
- Fundamental High Yield Corporate Bond Portfolio (PHB) – This product uses the RAFI approach to selecting its holdings using four factors: book value of assets, gross sales, gross dividends, and cash flow–each based on five-year averages. Note that PHB is classified in the high yield or “junk bond” category.
- Fundamental Investment Grade Corporate Bond (PFIG) – PFIG also uses the RAFI weighting methodology, but instead applies it to investment grade corporate bonds.