Rate Environment Changes, But Bond ETF 'BNDC' Remains Useful

Last year, the Federal Reserve raised interest rates four times, but that hawkish policy is out the window in 2019 as highlighted by the Fed’s rate cut last week. The Fed’s shifting monetary policy could underscore the utility of some actively managed fixed income exchange traded funds, such as the FlexShares Core Select Bond Fund (NYSEArca: BNDC).

BNDC looks to provide attractive risk-adjusted performance by investing in a portfolio of fixed-income securities and is designed to achieve 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.

Fixed-income ETF investors have been diving back into Treasury bonds and related exchange traded funds, with Treasury prices pushing higher despite the Federal Reserve’s indication of only a single rate adjustment.

The bond market is basically implying the Fed may be taking the wrong stance by not committing to a long-running rate-cutting cycle. Looking ahead, options traders at betting on a 64% chance the Fed could cut interest rates in its upcoming September meeting.


BNDC uses an ETF of ETFs structure and currently features exposure to mortgage-backed securities, the FlexShares Credit‐Scored US Corporate Bond Index Fund (NasdaqGM: SKOR) and the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF), among other bond funds.

SKOR is not the run of the mill corporate bond ETF. The new 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.

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.

BNDC, which is nearly three years old, has a 30-day SEC yield of 2.56% and a weighted average effective duration of 5.77 years, according to issuer data.

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