A small number of ETFs offer “fundamental” indexing. Virtually all bond indexes assign weights based upon outstanding debt. With fundamental bond indexing, securities are weighted based on measures of the issuers’ financial strength—not the market value of outstanding bonds. Advocates of fundamental bond indexing point out a traditional index (or ETF) could end up overweighting heavy indebted companies, thereby resulting in higher credit risk to investors.
Critics of fundamental bond indexing point out there can be a weak link between debt load and bond returns. For example, Japan has the highest debt-to-GDP ratio among all developed countries, but yields on its government securities are among the lowest. IndexUniverse research shows fundamental bond indexed portfolios are not as liquid as those weighted by market value.