Keeping Score With This Corporate Bond ETF
This article was originally published on ETFTrends.com.
When mulling corporate bonds and the related exchange traded funds, advisors and investors often focus on credit ratings. The FlexShares Credit‐Scored US Corporate Bond Index Fund (SKOR) takes a different approach.
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.
“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.”
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.
SKOR's Focus
SKOR's selection universe includes bonds with maturities of two to 10 years. The ETF has a weighted average effective duration of 4.69 years.
“We believe the FlexShares Corporate Bond Credit Scoring Model is a fully objective credit evaluation process that allows us to construct innovative corporate credit indexes, with little reliance on NRSRO ratings,” said FlexShares. “Instead the model evaluates debt issuers based on economic analysis such as management efficiency, profitability and market solvency, which are then sorted and ranked within five macro industry sectors.”
Clearly, SKOR focuses on more than just credit ratings alone, but that does not mean the ETF's portfolio is risky. Essentially all of the fund's holdings are rated AA, A or BBB by S&P. SKOR, which debuted in November 2014, has a 30-day SEC yield of 3.33%, according to issuer data.
The model that serves as a backstop for SKOR “also 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.”
For more information on the fixed-income space, visit our bond ETFs category.
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