Getting intermediate bond exposure can help investors toe the line between getting more yield while limiting credit risk using an ETF like the FlexShares Credit-Scored US Corporate Bond Index Fund (SKOR).

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.

With inflation on the move, getting enough yield is necessary to prevent erosion of income. At the same time, investors will want to limit duration in order to stave off rate risk as yields rise.

“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,” FlexShares says. “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.”

Advantages of Bond ETFs

Having bond holdings in an ETF wrapper certainly has its advantages. Whether it’s short, intermediate (like SKOR), or long duration, investors can get targeted exposure to bonds that suit their specific investment goals.

“I like to use several bond index exchange-traded funds as a core holding,” wrote Michael Aloi, CFP® in a Kiplinger article. “I may use an inflation protected securities fund, an intermediate-term bond fund, and a short-term bond fund as my core fixed income position. Higher-income investors can use municipal bond index funds to generate federal tax-free interest (though municipal bond interest may still be subject to state and local taxation and the alternative minimum tax).”

Aloi also noted advantages of using ETFs, particularly those that follow a passive index. Two primary benefits relate to cost and diversification of holdings.

“Index ETFs are generally lower in cost than actively managed funds. Keeping costs down is crucial in a low-yield world,” Aloi added. “Bond index funds also provide instant diversification. Different types of bonds behave differently – some bonds are more interest rate sensitive – so diversification is important.”

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