PowerShares Bond ETF Switches Index

NEW YORK (TheStreet) -- PowerShares recently altered the investment strategy of one of its fixed income-focused products. The renamed PowerShares Fundamental High Yield Corporate Bond Portfolio(PHB) now has a fundamental focus instead of a market weighted one, a move which may signal the ushering in of a new era for bond market exchange traded funds.

The change made to PHB has been highlighted as a way to protect investors from heavy exposure to companies most at risk of default. However, the transformation also highlights the broader shift providers are making towards "smart" and alternative weighting ETF products.

PowerShares already boasts a collection of equity-based products which utilize quantitative strategies to provide investors with instruments that both track and (ideally) beat their underlying indexes. A number of these funds trade under the "Dynamic" moniker. High yield bond ETFs such as iShares iBoxx $ High Yield Corporate Bond Fund (HYG) and SPDR Barclay's Capital High Yield Bond ETF(JNK) take on the corporate bond market by utilizing passive indexes. While effective at providing investors exposure to the market as a whole, a glaring problem arises when using this technique. Oftentimes, the indexes underlying funds such as HYG will be heavily exposed to companies which are the biggest debtors and therefore the most likely to default.

In early August, PowerShares announced that it was to going to make a dramatic change to its PowerShares High Yield Corporate Bond Portfolio. This fund, which previously tracked the Wells Fargo High Yield Bond Index(WFC), has accumulated $220 million in assets and currently changes hands on average, over 100 thousand times each day.

Although it has proven popular, the fund has changed focus as of this month, now tracking the RAFI High Yield Bond Index. Unlike its former index which is similar to HYG and JNK that employ a passive investing strategy, this new index uses a fundamental screening strategy to determine where it places its bets. According to its release, this alteration was made in order to avoid an overexposure to indebted companies.

Going forward, exposure to the corporate bond market will be based on four separate factors. Variables considered when constructing the index include current book value, gross sales, gross dividends, and cash flow. The fund will be rebalanced at the end of every month.

In order to reflect this structural change, the fund's name has also been altered. Today investors will find the PowerShares Fundamental High Yield Corporate Bond Portfolio in the space where the PowerShares High Yield Corporate Bond Portfolio previously presided. Despite boasting a new title, the fund continues to trade under the symbol PHB.