Market Overview

Keep Score With This Corporate Bond ETF

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Keep Score With This Corporate Bond ETF

Investment-grade corporate bonds are enjoying a nice start to 2019. One of the exchange traded funds participating in that theme is the FlexShares Credit-Scored US Corporate Bond Index Fund (NASDAQ: SKOR).

What To Know

SKOR is up 3.28 percent year to date after hitting a 52-week high last Friday. A departure from traditional cap-weighted corporate bond ETFs, SKOR tracks the Northern Trust Credit-Scored US Corporate Bond Index. That index emphasizes traits such as issuer profitability and quality in assembling its lineup of investment-grade debt.

“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 credit worthiness 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.”

Why It's Important

Heading into this year, some bond market observers were concerned about a potential raft of downgrades of BBB-rated bonds to junk status. Bonds with BBB ratings are one to three notches above junk classifications.

While some of those fears are abating amid speculation that the Federal Reserve will not raise interest rates or could even cut rates later this year, SKOR's focus on profitability and quality can help investors weather credit market storms. The fund also has the potential to guard against liquidity concerns.

“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.”

What's Next

Over 45 percent of SKOR's 404 holdings are rated AA and A while 52.4 percent are rated BBB. Like traditional corporate bond ETFs, SKOR is heavily allocated to bonds issued by financial services companies. Those bonds represent over half the fund's weight.

SKOR has a 30-day SEC yield of 3.29 percent and a weighted-average effective duration of 4.64 years.

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