Keeping Score With This Corporate Bond ETF

May 3, 2016 8:18 am
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Keeping Score With This Corporate Bond ETF

A sanguine interest rate environment and continuing speculation that the Federal Reserve is unlikely to raise interest rates any more than twice this year are among the catalysts helping investors rekindle their attraction toward corporate bond exchange-traded funds.

The love fest includes high-yield and longer-dated investment-grade corporate bond ETFs, but there are ways for investors to play a middle ground of maturities with investment-grade corporate bond ETFs. Enter the FlexShares Credit‐Scored US Corporate Bond Index Fund (NASDAQ: SKOR).

Keep Score With SKOR

SKOR, which debuted in the fourth quarter of 2014, holds nearly 250 bonds with maturities ranging from two years to 10 years. The ETF's weighted average effective duration is 4.89 years with an average yield to maturity of 2.43 percent. In an effort to ensure liquidity, SKOR only bonds with at least $500 million outstanding.

Related Link: Why It’s A Good Idea To Prefer Preferred ETFs

SKOR follows an index that “starts with a liquid issuer universe, employs a proprietary model for credit scoring and then optimizes the index’s constituents to maximize the credit score while maintaining duration, spread and other characteristics similar to the intermediate corporate bond universe,” according to FlexShares.

The Methodology

In other words, SKOR is something of a new concept in the world of fixed income ETFs in that it is a strategic beta fund. Smart or strategic ETFs are commonplace in the world of equities, but the population of such funds in the bond universe is currently scant.

SKOR “employs a rules-based methodology that incorporates forward-looking financial metrics to optimize credit risk while providing improved transparency and liquidity as compared to legacy corporate bond benchmarks,” according to FlexShares.

Importantly, SKOR is proving its methodology can reward investors. Since coming to market, SKOR has outperformed the largest corporate bond ETF by nearly 170 basis points. SKOR does this without forcing investors to take excessive credit risk as over 54 percent of the ETF's holdings are rated AA or A and all of SKOR's top 10 holdings are rated at least BBB.

Nearly 45 percent of the bonds held by SKOR are issued by financial services companies, with almost 18 percent of the ETF's other holdings hailing from consumer sectors.

SKOR's 30-day SEC yield of 2.35 percent is nearly 50 basis points above where 10-year Treasury yields closed Monday. The ETF charges 0.22 percent a year, or $22 per $10,000 invested.

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