As market uncertainty remains around the Omicron variant, investors should get corporate bond exposure of the highest quality heading into 2022.
Moreover, rising inflation could put fixed income yields at risk of erosion, which makes corporate bonds an option for more yield. The U.S. Federal Reserve is also expected to raise interest rates amid an improving economy.
“With the prospect for a combination of rising interest rates but strong economic growth, we think investors should either remain in, or consider moving to, an overweight position in corporate bonds in their fixed-income portfolio allocations,” writes Dave Sekera in a Morningstar article. “For investors with higher risk tolerances, we expect that high-yield corporate bonds, with their shorter duration and higher yield, will continue to outperform investment-grade as they derive the most benefit from the ongoing economic rebound.”
“Considering we expect interest rates to rise over course of 2022, investors should consider keeping their portfolios tilted toward the middle of the U.S. Treasury yield curve,” Sekera adds. “In our view, this is the most attractive part of the yield curve as it provides the greatest amount of yield but carries much less interest-rate risk than the long end of the curve.”
A Credit-Scored Bond ETF Option
Investors can get corporate bond exposure heading into 2022 with exchange traded funds (ETFs) like the FlexShares Credit-Scored US Corporate Bond Index Fund (SKOR). The fund comes with a 0.22% net expense ratio.
SKOR seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Northern Trust US 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 Corporate Bond Index.
“Corporate bonds remain an important component of many investors’ fixed-income holdings, offering the potential for diversification and income generation,” a FlexShares Fund Focus article notes. “Low bond yields and the potential shortcomings of traditional credit scoring methodologies have made pursuing these potential benefits more difficult.”
“The FlexShares Credit-Scored US Corporate Bond Index Fund (SKOR) is designed to address the needs of these investors and the conditions of today’s fixed-income markets by employing multi-factor selection criteria and diversification controls that we believe may enhance the portfolio’s risk-adjusted returns,” FlexShares adds.
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