Shifts in Credit Quality Spotlight Opportunity With This ETF | ETF Trends

The coronavirus pandemic is having a material impact on the corporate credit landscape, which could highlight the importance of bond quality. Investors can tap into that theme with 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.

“Among the most visibly accelerated long-term trends has been the expanded role of the government through sweeping global policy responses,” said Fitch Ratings in a recent note. “The scope of the global fiscal and monetary stimuli have matched the unprecedented speed and depth of the economic contractions brought on by sudden and prolonged lockdowns. Before the pandemic, long-term trends included sustained lower interest rates, reduced fiscal headroom and higher government debt burdens.”

The Scoop on SKOR

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 quality purview is particularly relevant and important in the coronavirus climate.

“A protracted recovery will hit corporate top-line revenues and squeeze profitability. This will most likely negatively affect private-sector capital investment, which had already had lagging economic growth over the past decade,” notes Fitch. “Fixed investment, which had been constrained in favor of dividends, share buybacks, and inorganic growth through mergers and acquisitions, will face fresh challenges as a result. This will weigh on productivity growth and, in turn, long-term growth potential for both issuers and economies at large.”

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.”

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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.