With concerns increasing that the junk bond market could be home to more defaults this year, investors that want to skirt problematic issuers while still generating income may want to consider the FlexShares High Yield Value-Scored Bond Index Fund (NYSEArca: HYGV).

HYGV seeks investment results that correspond generally to the price and yield performance of the Northern Trust High Yield Value-Scored US Corporate Bond IndexSM (the underlying index). The fund generally will invest at least 80% of its total assets (exclusive of collateral held from securities lending) in the securities of its underlying index. The underlying index reflects the performance of a broad universe of U.S.-dollar denominated high yield corporate bonds that seek a higher yield than the overall high yield corporate bond market, as represented by the Northern Trust High Yield US Corporate Bond Index.

“The willingness of banks to supply credit to businesses deteriorated considerably at the start of 2020’s second quarter,” said Moody’s Investors Service. “According to a Federal Reserve survey of bank loan officers, the net percent of responding banks tightening standards on commercial and industrial loans jumped up from the 0.0 percentage points of 2020’s first quarter to the 41.5 points of the second quarter.”

Leaning Toward Quality

HYGV focuses on value by pursuing the higher risk/return potential found by concentrating on a targeted credit beta; utilizes Northern Trust Credit Scoring methodology to eliminate bottom 10% of issuers; performs liquidity assessment based on issuer’s debt outstanding, age and remaining time to maturity with the purpose of eliminating the bottom 5% illiquid securities; and intends to match the duration of a market cap weighted index (ICE BofAML US High Yield Index), while maintaining sector neutrality.

“During the Great Recession, the net percent of banks tightening business loan standards peaked at fourth-quarter 2008’s record high of 83.6 points. When the Great Recession was at its worst during October 2008 through March 2009, the net percent of banks tightening C&I loan standards averaged 73.9 points,” according to Moody’s.

HYGV hones in on value with a proprietary credit scoring model that maximizes factor inputs for value while at the same time, effectively screens for quality and liquidity risk. The bond issuers are then fundamentally evaluated against current market conditions, with low-quality issuers precluded from the index.

The $150.5 million HYGV has a 30-day SEC yield of 6.32%.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.