With the recent move into higher-yielding, longer-dated bonds, one corporate debt fund to consider is the FlexShares Credit-Scored US Long Corporate Bond Index Fund (LKOR).
LKOR seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Northern Trust US Long Corporate Bond Index. The underlying index reflects the performance of a broad universe of U.S.-dollar denominated investment grade corporate bonds that can potentially deliver a higher total return than the overall investment grade corporate bond market, as represented by the Northern Trust US Investment Grade Long Corporate Bond Index.
“The construction of the index begins with a securities screen to determine eligible securities,” a FlexShares Fund Focus article said. “Once all eligible securities have been identified, the index attempts to optimize the exposure to quantitative factors by assigning both a Value Score and Quality Score in order to arrive at a Composite Alpha.”
Getting a quality score includes looking at three primary components: management efficiency, profitability, and solvency.
“The primary objective of the optimization is to maximize the indices exposure to the Composite Alpha, and maintain a similar effective duration4 profile relative to our eligible universe,” the Fund Focus noted.
A Volatile Yield Environment
Bond yields have been on the move as of late, but not in the right direction for fixed income investors. With the notion that transitory inflation will supplant long-term inflation, the Federal Reserve could prolong rate raises further.
That said, fixed income investors will want to seek opportunities where they can get that added dose of yield without sacrificing quality. This is where LKOR comes into play, by providing not only income opportunities, but diversification to fixed income portfolios.
“We believe that the index’s composite value and quality score ranking creates the potential for greater diversification and income generation, and may enhance risk-adjusted returns,” the FlexShares Fund Focus noted. “We believe the quality scoring methodology using contemporary measures of overall credit risk, may provide an improvement over legacy credit rating methodologies.”
“This unique approach represents the kind of innovation that, in our view, is needed to help investors pursue the traditional benefits of corporate bond investing in an evolving fixed-income landscape,” the Fund Focus added.
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