With investors scrambling to find additional income in today’s low-yield climate, corporate bonds and the related ETFs could be popular destinations. One way to add some quality to that asset class is with the FlexShares Credit‐Scored US Corporate Bond Index Fund (NasdaqGM: SKOR).
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 holds 357 corporate bonds and has a 30-day SEC yield of 2.51%. The fund is up nearly 8% year-to-date and resides near all-time highs. The ETF moves beyond relying solely on traditional corporate bond ratings as a metric of quality.
“Until the economic crisis of 2008, many investors relied on the ratings provided by the nationally recognized statistical rating organizations (NRSROs) to help make the full determination of creditworthiness of an individual bond issuer,” said FlexShares in a recent research piece. “In recent years, however, we developed a quantitative model that we believe helps identify and respond to changing issuer/industry information and shifting macro environments.”
Working On Keeping SKOR
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. As is the case with many corporate bond ETFs, SKOR is heavily allocated to financial services issuers (just over 50%) because of that sector’s massive issuance of corporate debt following the global financial crisis.
SKOR allocates 53% of its weight to bonds rated BBB and 38.39% to corporate debt rated A. There were concerns about BBB-rated debt heading into this year, but those worries have mostly been allayed.
“To make a long story short, as the Federal Reserve raised interest rates four times last year, some bond market observers fretted that issuers behind BBB-rated debt could be pinched if the economy slowed because many of those companies took advantage of low-interest rates and issued more debt. Then downgrades could come, forcing trillions of dollars of once IG debt into junk territory,” according to Nasdaq.
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.”
For more information on the fixed-income space, visit our bond ETFs category.