Fixed income investors face a quagmire in today’s environment: Interest rates are low, but accessing higher bond yields usually means taking on more risk. The FlexShares Credit‐Scored US Long Corporate Bond Index Fund (CBOE: LKOR) is an idea for dealing with the low yield/elevated risk scenario confounding many bond investors.
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.
In fact, LKOR’s longer duration is advantageous at a time when interest rates are low and unlikely to move higher anytime soon.
“Investors—especially retirees and other conservative investors—need to shift how they view bonds. Instead of relying on bonds for income, investors should embrace bonds as ballast,” reports Gail Marks Jarvis for Barron’s. “That means settling for low yields from Treasuries and high-quality corporate and municipal bonds, while tapping total return in stock and bond portfolios for income.”
Loving LKOR Now
LKOR follows the Northern Trust Credit-Scored US Long Corporate Bond Index, which addresses potential corporate bond liquidity challenges by optimizing a carefully selected subset of all credit issuers from which illiquid, orphaned and small lot names have been removed,” said FlexShares. “Then, multiple factors are taken into account including the characteristics of issuers’ total debt structure, minimum exposure percentages, and odd-lot trade restrictions, to aid in developing our corporate bond indexes.”
LKOR is meaningful at a time when investors are struggling to source and some are likely taking on too much in the process.
“Investors have gone further out on the risk curve, allocating larger portions of their portfolio to high-yield, emerging-market debt, and bank-loan funds. That risk-taking hurt badly in the coronavirus market rout between Feb. 19 and March 23,” according to Barron’s.
The ongoing low-yield environment and improving economic sentiment has helped push investors toward corporate debt. However, potential investors should be aware that corporate bonds have historically exhibited greater volatility than U.S. Treasuries due to the increased volatility in corporate cash flows and credit risks, along with greater liquidity risks.
LKOR’s quality purview is relevant at a time when many corporate bond investors may be feeling too sanguine simply because the Federal Reserve is stepping into the market. While the Fed is buying corporate ETFs, that doesn’t mean the asset class is free of risk. At the very least, LKOR reduces some of that risk.
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.