Investors looking for an asset class that’s holding steady among the recent market swoon and one that features steady income should consider investment-grade corporate bonds. More discerning eyes should view the FlexShares Credit‐Scored US Long Corporate Bond Index Fund (CBOE: LKOR).
LKOR tracks a fixed-income portfolio of corporate debt securities with a longer maturity selected based on a proprietary credit evaluation process.
LKOR excludes illiquid and smaller issuers to improve liquidity and transparency. Additionally, the fund targets company bonds that have a higher credit quality, lower risk of default and potential for higher yield and price appreciation. LKOR holds 219 bonds with a weighted average maturity of 14.77 years, according to issuer data.
LKOR, which yields 3.54%, is up about 6% this year and hit an all-time high on Thursday on a bad day for equities.
Looking Into LKOR
Bond investors who are wary of dipping too far into junk bond territory but want better yield payouts than Treasuries may consider investment-grade corporate bond ETFs.
With Treasury yields recently having breached the 1% level, advisors and investors are scrambling to source yield with bonds, but with the coronavirus knocking high-yield corporate debt down a peg, other corporate bond strategies could come into focus.
The ongoing low-yield environment and improving economic sentiment has helped push investors toward corporate debt. However, potential investors should be aware that corporate bonds have historically exhibited greater volatility than U.S. Treasuries due to the increased volatility in corporate cash flows and credit risks, along with greater liquidity risks.
Related: 10 Best Fixed Income ETFs of 2019
The current environment is trying for corporate bonds and the related ETFs. With elevated concerns regarding a raft of potential downgrades for corporate debt hovering just above junk status, some bond investors are emphasizing fundamentals, a virtue extolled by LKOR.
LKOR follows the Northern Trust Credit-Scored US Long Corporate Bond Index, which 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.”
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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.