FlexShares launches value-tilted high-yield bond ETF

Jul 19th, 2018 | By | Category: Fixed Income

Northern Trust’s FlexShares has expanded its fixed income lineup with the launch of the FlexShares High Yield Value-Scored Bond Index Fund (HYGV US) on NYSE Arca.

Mark Carlson, senior investment strategist at FlexShares

Mark Carlson, senior investment strategist at FlexShares.

The new ETF screens a universe of high-yield US dollar-denominated corporate debt to target those with favourable fundamental qualities, market valuations, and liquidity.

“As high-yield bonds have become a mainstream fixed-income asset, we believe fund providers have sacrificed their original focus on yield generation,” said Mark Carlson, senior investment strategist at FlexShares.

“Our new value-scored high-yield fund offers investors an innovative approach to income generation by focusing on maximizing the value factor to enhance total return potential, while also placing a renewed focus on the ‘yielding’ aspect of high yield.”

HYGV tracks the Northern Trust High Yield Value-Scored US Corporate Bond Index created in-house by Northern Trust. It is based on the Northern Trust High Yield US Corporate Bond Index universe, which consists of non-investment grade bonds with at least a year remaining to maturity and an outstanding amount of at least $150 million.

Securities in the index are analysed on their value factor, credit factor, and liquidity factor scores, as determined by proprietary models from the firm’s quantitative research team.

Securities ranking in the lowest decile of the universe’s credit scores are initially eliminated from index selection. The remaining securities are then optimized to maximize exposure to the value factor while adhering to certain constraints.

No issuer in the index may account for more than 5% of the total index weight, while sector weights and the effective duration of the index may not deviate more than 8% and 0.1 years respectively from the parent index.

Industrials, consumer, and energy make up the three largest sector exposures with weights of 33.9%, 23.3%, and 18.3% respectively. The effective duration of the smart beta index is currently 4.2 years.

Turnover is also limited to a maximum of 15% at each monthly reconstitution and rebalancing, and new issuances that fall in the bottom 5% of liquidity factor scores within each sector are also restricted from inclusion.

“The addition of the FlexShares High Yield Value-Scored Bond Index Fund will enhance our suite of efficient fixed income funds, providing investors a diverse set of income generating products within the FlexShares lineup,” added Darek Wojnar, head of Northern Trust’s funds and managed accounts group.

“We believe our deep fixed-income expertise and selective approach to product development will help our clients meet their investment goals and potentially deliver income in a dynamic market environment where traditional income sources have become less predictable.”

The fund has an expense ratio of 0.37%.

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