The benchmarks only include bonds with at least $250 million outstanding for each issue. "So if a corporation had five bond issues and only one of them had $250 million outstanding, we'd only take that one," Ryan said. "We only wanted to take the most liquid issues."

Only investment-grade issues are accepted as well. They also need to have at least one-year call protection on the shortest-term index and a minimum of three years on the others. "Bonds that run out of call protection will get priced to their call dates. And that causes distortions in valuations," Ryan says. "That kind of volatility isn't acceptable."

He has also set a cap of 5% per issuer and the index is rebalanced monthly. The indexes are also equal-weighted. "In bond land, usually the worst a company's credit the more it issues bonds. So you don't want an index to be heavily skewed to the problem issuers as happens with a market-cap weighted index," Ryan says.

"Everywhere you look, major institutions are passing policies to protect themselves against terrorism and political risks. But that's very tough to do," Ryan says.

Having an index that takes on that sort of watchdog duties over should fit right into the current trends of how big pension funds and institutions are investing these days, he adds.

The problem with current bond index funds, Ryan says, is that ETF providers and mutual fund companies make the mistake of trying to replicate corporate bond indices that are just too big. The new indexes will have 125 to 250 different bonds in each.

Next Stop: Tracking Errors

"With the liquidity problems in corporate bonds, they're forced to come up with some sort of sampling methodology. And that just leads to tracking error issues," Ryan says.

It sounds like another great idea from his shop. What if it doesn't work?

Ryan isn't soured on ETFs at all. "I think ETFs are a great investment vehicle, especially as more people move to tactical allocation," Ryan says.

That's different is different from making strategic allocations. "Strategic was very much a static allocation," Ryan said. "By contrast, tactical allocations are more dynamic in nature. They're more responsive to changing investment situations."

In the late ‘90s, he says big pension plans and institutional investors—as well as individuals—let their winnings build up as markets boomed. When times changed, they got hit hard.

"It's like sports. When you're way ahead, you don't keep piling up the score—you change tactics and play more defensively," Ryan said. "That's what we're seeing major corporations doing these days as well as more individuals."

And he doesn't consider tactical allocation shifts to be market timing. "It doesn't have anything to do with what's going on in the market. Tactical allocations are made as you assess where you are in your long-term investment plan," Ryan says. "It's part of a periodic process of taking stock of how far you've come and where you're going."

With the built-in flexibility, transparency and low-cost of ETFs, he believes more sophisticated and investor-focused indexes are bound to keep coming out. "As more investors turn to index-based investing," Ryan says, "the market for indices that can help people tailor their investing will continue to grow."

Murray Coleman is managing editor of IndexUniverse.com. He can be reached at: This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

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