A Weighted Average Credit Rating (WACR): What Is It?
The weighted average rating applied to all bonds within a bond fund is known as the weighted average credit rating, or WACR. This grading process gives investors a sense of the credit quality of a fund. Determining the total risk associated with a bond portfolio is also helpful. Bond funds with lower weighted average credit ratings are considered riskier. A weighted average credit rating, such as AAA, BBB, or CCC, is expressed as a letter rating.
Functions of a Weighted Average Credit Rating (WACR)
Different methods are used in the banking sector to calculate a weighted average credit rating (WAR). Generally speaking, the weighted average credit rating incorporates each credit rating’s percentage of the whole portfolio and its value. The fund can calculate the average credit rating using individual rating weights.
A weighted average credit rating might help investors determine a bond fund’s credit quality.
Particular Points to Remember
When assessing the credit quality of a fund, investors have access to statistics other than the weighted average credit rating. Statistical reporting firms may also include a linear component in their computations of weighted average credit ratings. This approach determines the proportionate weight of the value of each rating level in a manner akin to conventional weighted intermediate computations.
Each rating level is given a linear factor using linear factor computations based on the likelihood of a rating default. The proportionate credit ratings of the bonds in the portfolio are used to calculate an average linear factor. The matching linear factor is then used to calculate the weighted average credit rating.
Disapproval of Weighted Average Credit Scores
There is debate concerning this kind of ranking. Due to investor uncertainty, the weighted-average credit rating procedure has been contested in the bond fund business. All possible rating categories a fund may invest in may be considered via a weighted average rating approach. Because of this, the fund may not own any bonds in the designated weighted middle rating group, which might need to be clarified for those who see the tabulated data.
A Weighted Average Credit Rating (WACR) example
An average credit rating of B+, which falls between BBB and CCC, might be assigned to a bond having 25% of its value in AAA, 25% in BBB, and 50% in CCC. The fund doesn’t own any B+ bonds, so investors could not get a positive picture from this. Because of this, most bond funds decide to include in their marketing materials a scale that is weighted according to credit rating. This makes it easier for investors to comprehend the concentration of bonds based on ratings rather than relying just on the weighted average credit rating data.
With almost $6 billion in assets, the Vanguard Long-Term Corporate Bond ETF is a sizable bond product. Neither its fund reporting nor marketing materials provide a weighted average credit rating. Instead, the following scale is included, which displays the credit quality dispersion as of December 31, 2020.
Investors may learn more about a fund’s overall credit quality by looking at its weighted average credit rating, which can be assigned an AAA, BBB, or CCC grade.
Conclusion
- To determine the average credit rating, the weighted average credit rating is computed by taking into account the percentage of each credit rating’s value and recording it as a percentage of the whole portfolio.
- Some people have doubts about weighted average credit ratings since they might need clarification from investors who must fully comprehend the rating. A fund’s credit quality is also determined by its linear components, rated according to default likelihood.
