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 that are correlated with debt service capacity–tilted toward higher credit quality firms or countries with lower risk of downgrade or default. Whether for corporate bonds or sovereign debt, the resulting indices historically have offered better risk-adjusted returns, according to simulations.
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, leaving investors overexposed to companies or countries with high debt burdens and credit risk.
Our approach to building a better bond solution is to create a better foundation for fixed income investing that stresses higher quality, lower risk, and improved risk-adjusted returns, while maintaining the benefits of passive index investing, i.e., transparency, broad representation, and diversification. RAFI Bonds offer a more thoughtful fixed income solution.