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New Corporate Bond ETF Makes the Middle Look Good

ETFtrends.com

After hauling in $17.7 billion in October, a monthly record, fixed income exchange traded funds are spending plenty of time in the limelight.

The bond ETF conversation has been dominated by those funds with exposure to the long end of the yield curve because those ETFs have turned in stellar performances amid this year’s tumble for Treasury yields. Short duration bond ETFs have also been widely favored by investors preparing for the possibility of a 2015 interest rate hike by the Federal Reserve. [Short Duration Bond ETFs Have Plenty of Fans]

Somewhat forgotten have been middle maturity offerings. The FlexShares Credit‐Scored US Corporate Bond Index Fund (SKOR) , which debuted Thursday has the potential to change that. SKOR focuses on investment-grade corporate bonds with middle maturities ranging from two to 10 years.

That gives the SKOR a weighted average effective duration of 4.72 years, which is about three years less than the effective duration of 7.76 years on the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) .

“Regulatory changes impacting the fixed income capital markets and persistent low interest rates have caused institutional investors and financial advisors to reassess their investment options for exposure to corporate bonds,” said Shundrawn A. Thomas, head of Northern Trust’s Funds and Managed Accounts Group, in a statement. “The FlexShares Credit‐Scored US Corporate Bond Index Fund 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.”

Importantly, 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’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. Over 60% of the ETF’s 95 holdings are rated AA or A by Standard & Poor’s.

At the sector level, nearly 45% of SKOR’s holdings hail from the financial services sector with almost 15.6% coming from consumer-related issues and 15.1% from tech, telecom and media issuers. Seven of SKOR’s top-10 holdings are courtesy of financial institutions with bonds from IBM (IBM), Verizon (VZ) and Apple (AAPL) the outliers.

SKOR charges 0.22% per year. The fund is the fifth bond ETF from FlexShares and second new fixed income offering this year from the firm. Chicago-based FlexShares introduced the FlexShares Disciplined Duration MBS Index Fund (MBSD) in September. [FlexShares Launches New MBS ETF]

SKOR Maturity

skor

Table Courtesy: FlexShares

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of Apple and LQD.

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.