Rethinking the Role of Bonds in Retirement Portfolios | ETF Trends

Fixed income assets previously served as bedrocks of retirement portfolios, but in today’s ultra-low yield environment, retirees may need to rethink how bonds impact their investment rosters. The FlexShares Credit‐Scored US Corporate Bond Index Fund (NasdaqGM: SKOR) can help.

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.

“I think some reframing is in order with respect to fixed-income assets,” said Morningstar director of personal finance Christine Benz in a recent note. “I think that investors need to get over this idea that they will be big yield or income producers for their portfolio. That ship has sailed over the past decade where we’ve seen yields really going lower and lower.”

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 Matters Today

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

“I think you need to look at bonds as being portfolio stabilizers–sources of cash flow that you can draw upon when your equities are down,” notes Benz. “I like the idea of retirees building themselves kind of a bulwark against an equity market shock that consists of cash and bonds for that very reason–that they can be sources of cash flow.”

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.

“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 yields 2.77%.

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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.