Prepare for Better Credit Quality With This IG Corporate Bond ETF

Corporate credit quality could be ready to take a step forward and investors can leverage that theme via the FlexShares Credit‐Scored US Corporate Bond Index Fund (NasdaqGM: SKOR).

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.

“Corporate bond issuance by U.S. companies continues to boom. Not even heightened equity market volatility was able to materially slow borrowing by investment-grade corporates,” notes Moody’s Investors Service. “In terms of a moving 12-month sum, the issuance of investment-grade bonds by U.S. companies advanced 70% year-over-year to a record high $1.508 trillion for the year-ended August 2020.”

Bond funds hold a collection of debt with varying maturities, buying and selling debt securities to maintain their short-, intermediate- or long-term strategy. When it comes to bond ETFs, investors should look at the duration, or a bond fund’s measure of sensitivity to gauge their investment’s exposure to changes in interest rates – a higher duration means higher sensitivity to shifts in rates.

SKOR’s Increasingly Relevant

Fortunately, there’s some sector diversity in the latest wave of investment-grade issuance.

“U.S. nonfinancial companies have led the latest surge by IG bond offerings. During the year-ended August 2020, the 79% annual advance by the bond issuance of U.S. nonfinancial companies to a record $1.078 trillion well outran the accompanying 51% annual increase by U.S. financial companies to $430 billion,” according to Moody’s.

SKOR’s scoring methodology indicates the fund is appropriate for a broad swath of investors, including those looking to reduce risk.

“The FlexShares Credit Scoring Model addresses the corporate bond liquidity challenge by optimizing a carefully selected subset of all credit issuers of which illiquid, orphaned and small lot names have been removed,” according to FlexShares. “The model also takes into account multiple factors to aid in developing improved corporate bond indexes, including the characteristics of issuers’ total debt structure, minimum exposure percentages, and odd-lot trade restrictions.”

SKOR is up nearly 5% year-to-date and sports a 30-day SEC yield of 2.78%.

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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.