The Federal Reserve is buying investment-grade corporate bond ETFs. The FlexShares Credit‐Scored US Corporate Bond Index Fund (NasdaqGM: SKOR) isn’t on the central bank’s list.
That’s too bad for the Fed, but investors can still benefit from SKOR’s unique methodology as investment-grade corporates regain momentum. SKOR tracks the Northern Trust Credit-Scored US Corporate Bond Index, which focuses on issues from companies with quality characteristics such as strength in management efficiency, profitability, and solvency, according to FlexShares.
“Actions taken by the Fed have played a major role in lifting corporate bonds, many investors and analysts say,” reports Sam Goldfarb for the Wall Street Journal. “Data released by the central bank late Thursday indicated it bought around $1.5 billion of corporate-bond ETFs in the week ended Wednesday. That brought its total holdings to $1.8 billion after it started buying the securities early last week.”
Sizing Up SKOR
Bond funds hold a collection of debt with varying maturities, buying and selling debt securities to maintain their short-, intermediate- or long-term strategy. When it comes to bond ETFs, investors should look at the duration, or a bond fund’s measure of sensitivity to gauge their investment’s exposure to changes in interest rates – a higher duration means higher sensitivity to shifts in rates.
SKOR’s underlying index only includes issues with at least $500 million outstanding. SKOR intentionally excludes smaller, illiquid issues to enhance its liquidity and transparency profile.
“Perhaps inspired by the Fed, individual Investors also have been pouring money into bond funds. Net inflows into high-yield funds totaled $1.6 billion in the week ended Wednesday, bringing the three-week total to nearly $10 billion, according to Refinitiv Lipper,” according to the Journal.
SKOR’s scoring methodology indicates the fund is appropriate for a broad swath of investors, including those looking to reduce risk.
“The FlexShares Credit Scoring Model addresses the corporate bond liquidity challenge by optimizing a carefully selected subset of all credit issuers of which illiquid, orphaned and small lot names have been removed,” according to FlexShares. “The model also takes into account multiple factors to aid in developing improved corporate bond indexes, including the characteristics of issuers’ total debt structure, minimum exposure percentages, and odd-lot trade restrictions.”
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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.