FlexShares introduces credit-scored US corporate bond ETF

Sep 29th, 2015 | By | Category: Fixed Income

FlexShares, the exchange-traded funds arm of Northern Trust, has introduced the FlexShares Credit-Scored US Long Corporate Bond Index Fund (LKOR) offering exposure to long-maturity US corporate bonds complemented by a credit evaluation process.

FlexShares launch credit-scored US bond ETF

FlexShares use a proprietary credit scoring methodology to assess the universe of US investment grade bonds.

According to FlexShares, the strategy is designed to provide investors with the yield benefits of longer maturity (10+ years) investment grade corporate bonds, while offering a method of capital protection through credit evaluation and improved liquidity.

“A combination of market structure and regulatory changes has caused investors to reassess their investment options for long-term credit exposure,” said Shundrawn Thomas, head of Northern Trust’s Funds and Managed Accounts Group. “The FlexShares Credit-Scored US Long Corporate Bond Index Fund provides investors with a contemporary approach to optimising credit risk, with improved transparency and liquidity relative to legacy corporate bond benchmarks.”

The underlying index is the Northern Trust Credit-Scored US Long Corporate Bond Index. In order to be eligible for the index, issuers and securities must first meet liquidity criteria. Following this, the constituents are scored using Northern Trust’s proprietary credit scoring methodology that focuses on forward-looking fundamentals. Finally, an optimisation process is employed to maximise the credit score exposure while maintaining similar characteristics to the long-maturity corporate bond universe.

The credit scoring methodology seeks to identify companies that exhibit strength in both short- and long-term solvency. This is measured based on a quantitative ranking of various metrics obtained from company filings and recent price activity. The scores have three components: management expertise (e.g. corporate finance activities), profitability (e.g. the reliability and sustainability of financial performance) and solvency (short- and long-term).

Listed on the Nasdaq exchange, the fund yields 4.75% (as of 24 September 2015), carries a net expense ratio of 0.22% (agreed until 8 September 2016) and a gross expense ratio of 0.23%.

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