Looking for Trade War Protection? Look to Corporate Bond ETFs

Equities are clearly vulnerable to the US/China trade war, but there are ways for investors to get some protection while generating income, including with corporate bonds and the related exchange traded funds.

The FlexShares Credit‐Scored US Corporate Bond Index Fund (NasdaqGM: SKOR) has traded modestly higher over the past week. 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.

SKOR is not the run of the mill corporate bond ETF. The ETF tracks the Northern Trust Credit-Scored US Corporate Bond Index, which focuses issues from companies with quality characteristics such as strength in management efficiency, profitability, and solvency, according to FlexShares.

“If the trade disruption leads to lower interest rates and easier monetary policy world-wide, as expected, it should only speed global investors’ march into U.S. corporate debt,” reports Alexandra Scaggs for Barron’s. “So while corporate yields may initially fall less than Treasuries, that could be a “buying opportunity,” says Bank of America Merrill Lynch.”

Looking Under the Hood of SKOR ETF

SKOR holds 357 bonds and has a 30-day SEC yield of 2.51%. The fund’s weighted average effective duration if 4.82 years.

The model that serves as a backstop for SKOR “also 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.”

Related: Fixed-Income ETF Investors Reveal an Optimistic Outlook

Goldman Sachs “has also said that investment-grade companies’ bonds should hold up better in a trade war. Those ‘firms should be better suited to manage trade-related supply chain and end-market disruptions relative to their [high yield]peers,’” reports Barron’s.

Over 91% of SKOR’s holdings are rated A or BBB and over 29% of the portfolio have maturities ranging from seven to 10 years.

For more information on the fixed-income space, visit our bond ETFs category.