Normally docile investment-grade corporate bonds have been anything but this year confirming that a tactical approach to the asset class is useful. Enter 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.
“Tactical bond investing is hard to do well. For most investors, the best approach is to find broadly diversified, low-cost funds with risks they’re comfortable taking and to stick with them,” said Morningstar analyst Alex Bryan in a recent note. “That said, there are some strategies, based on value and momentum, worth considering.”
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 underlying index only includes issues with at least $500 million outstanding. SKOR intentionally excludes smaller, illiquid issues to enhance its liquidity and transparency profile.
“Investors may be slow to detect changing credit quality, causing prices to adjust more slowly than they should,” notes Bryan. “Comfort with risk may also lag changing fundamentals, creating a knock-on effect where investors demand less compensation for credit risk after macroeconomic conditions improve and greater compensation after they deteriorate.”
SKOR can ameliorate some of those issues because in building the roster, “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,” notes FlexShares.
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.”
SKOR, which yields nearly 3%, is higher by 1% this year while the largest investment-grade corporate bond ETF is lower by roughly the same amount.
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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.