The City RAFI Bond Index Series decreases exposure to ageing and debt-laden economies such as Japan and the US and increases exposure to younger, resource-rich countries such as Australia and Canada.
The series extends Research Affiliates Fundamental Index (RAFI) methodology to sovereign debt.
Specifically, each country’s weight is calculated by taking the average of four factors – GDP, energy consumption, population and rescaled land area.
This results in a weighting that reflects each nation’s ability to service its debt, rather than rewarding those with the largest amount of debt.
The difference in weightings between the Citi RAFI developed markets index and equivalent sovereign developed markets capitalisation indices is substantial.
For example, it gives the US a 21.77% weighting, compared to a 27.66% weighting from comparable indices.
Rob Arnott, chairman and CEO of Research Affiliates, said: “Existing capitalization-weighted bond indices tend to overweight the largest debtors, without regard to whether they deliver a yield commensurate with the risk they are taking.
“It seems to us that weighting a bond index in proportion to underlying economic scale makes more sense than weighting in proportion to the outstanding debt.
“This new investable bond series will help investors find a more optimal way of investing in broadly diversified and transparent bond portfolios. We are pleased to work with Citi on developing this new series.”
The new series is available on Bloomberg and comprises both sovereign developed and emerging markets bond indices. A developed markets corporate bond index is planned for release in spring.