The tightening of credit spreads may dissuade fixed income investors from heading into corporate bonds, but an added dose of scoring efficiency can help ease credit risk concerns with the FlexShares Credit-Scored US Long Corporate Bond Index Fund (LKOR).
Rising yields are forcing credit spreads to tighten, which might cause investors to opt for the safer Treasury bonds. However, some analysts don’t foresee any further tightening moving forward.
“Spreads can go tighter, though not meaningfully tighter,” said Ken Monaghan, co-head of high yield at Amundi U.S. in a Reuters article.
Per the fund description, 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 US-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 noted. “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.”
Corporate Bonds in a Fixed Income Portfolio
Even as credit spreads tighten, corporate bonds offer fixed income investors diversification and relatively higher yield as compared to government debt. Furthermore, investors worried about credit risk have peace of mind knowing that LKOR’s strategy focuses on quality, investment-grade debt.
“Corporate bonds remain an important component of many investors’ fixed-income holdings, offering the potential for diversification and income generation,” FlexShares said. “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 Long Corporate Bond Index Fund (LKOR) 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,” the article added.
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