Von Aldo

Fundamental Bond Funds May Challenge Traditional Bond Index Funds

Our own Stan Luxenberg, our long-time mutual fund editor, tells me:

Rob Arnott, founder of Research Affiliates, a subadvisor to many mutual fund families, has been delivering solid returns with fundamental stock funds. Now he has introduced a fundamental bond fund. [He joins other asset managers, such as State Street's Fundamental Corporate Bond ETF (CBND).] Arnott is the subadisor to PowerShares' fundamental high-yield corporate bond fund.

Fundamental bond funds could pose a challenge to traditional bond index funds. Traditional bond index funds, such as Vanguard Total Bond Market Index, track cap-weighted benchmarks, such as the Barclays Capital U.S. Aggregate bond index. Arnott says these cap-weighted benchmarks make no sense because they give the heaviest weight to issuers that have the most bonds outstanding. Because Uncle Sam is the biggest issuer around, the Barclays Aggregate index has most of its assets in government bonds. At a time when S&P has downgraded U.S. debt, investors may not want to hold a big slug of Treasuries.

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