Core bond funds usually aren’t volatile, but these are unusual times. Recent turbulence in previously safe sectors of the fixed income space could be opening the door to opportunity with ETFs, such as the FlexShares Core Select Bond Fund (NYSEArca: BNDC), which is an alternative to funds tracking the Bloomberg Barclays Aggregate Bond Index.
BNDC looks to provide attractive risk-adjusted performance by investing in a portfolio of fixed-income securities and is designed to achieve the optimal potential for return, according to the prospectus. Moreover, the active component will adjust to potential changes in interest rate levels, the shape of the yield curve and credit spread relationships while emphasizing liquidity and diversification.
BNDC, which debuted in November 2016, uses an ETF of ETFs of approach and some of its holdings include other FlexShares funds, such as the FlexShares Credit‐Scored US Long Corporate Bond Index Fund (CBOE: LKOR) and the FlexShares Credit‐Scored US Corporate Bond Index Fund (NasdaqGM: SKOR).
Buying Into BNDC
BNDC has a weighted average effective duration of 6.23 years and a weighted option-adjusted spread of 115.16 basis points, according to issuer data.
In addition to Treasuries and corporate bonds, BNDC has exposure to mortgage-backed securities (MBS).
MBS are created when an entity acquires a bundle of mortgages and then sells the securities. Most MBS are seen as “pass-through” security where the principal and interest payments are passed through the issuer to the investor.
While MBS may offer modestly higher yields relative to U.S. Treasuries, the mortgage-backed bonds are exposed to prepayment risk – if rates dip before the security’s maturity, a homeowner can refinance debt, causing an investor to get back the principal early and reinvest it in a security with a lower yield.
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.
LKOR tracks a fixed-income portfolio of corporate debt securities with a longer maturity selected based on a proprietary credit evaluation process.
LKOR excludes illiquid and smaller issuers to improve liquidity and transparency. Additionally, the fund targets company bonds that have a higher credit quality, lower risk of default and potential for higher yield and price appreciation. LKOR holds 219 bonds with a weighted average maturity of 14.77 years, according to issuer data.
For more on multi-asset strategies, please visit our Multi-Asset Channel.
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.