Citi Fixed Income Indices (Citi) and Research Affiliates have come together to develop a new series of investable bond indices based on the Research Affiliates Fundamental Index (RAFI) methodology.
Citi brings its expertise and experience in fixed-income index related products and services to provide stable and replicable indices. Research Affiliates brings its research strength, product development capabilities and pioneering proprietary methodology on securities selection and weighting based on fundamental measures.
Known as the Citi RAFI Bond Index Series, the series will include sovereign and corporate bond indices and use fundamental measures to weight the index components.
Traditional bond indices weight securities based on market capitalization, which results in investors making their biggest bets on the biggest debtors.
The Citi RAFI Bond Index Series weights each country by its economic footprint. Each country’s weight is calculated via an equally weighted average of four factors‑‑GDP, energy consumption, population and rescaled land area. This methodology results in country weights that reflect each nation’s ability to service its debt, which has become a growing concern as the sovereign debt crisis evolves.
The Citi RAFI Bond Index Series weights index components by the issuer’s financial footprint and proxies for ability to service debt. This provides an alternative to market capitalization weighting, where index components are weighted by the issuer’s amount of outstanding debt.
The series tends to decrease exposure to aging and debt-laden economies such as Japan and the U.S. while increasing exposure to younger, resource-rich countries such as Australia and Canada. Available on Bloomberg, the new series comprises both sovereign developed and emerging markets bond indices. A developed corporate bond index will be released this spring. The indices are available for licensing from Citi.
Ryan ALM will continue to produce the RAFI US Investment Grade and High Yield bond index series.
The Citi RAFI Bond Index Series is available in The Yield Book, Citi’s web-based analytical tool that enables clients to manage their portfolios against various indices, analyze portfolio positions, quantify risk and identify drivers of performance.
