FlexShares upgrades US corporate bond ETFs with new factor indices

May 1st, 2020 | By | Category: Fixed Income

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Northern Trust’s FlexShares has announced changes to two ETFs providing exposure to US corporate bonds with the adoption of new indices that tilt towards quality and value factors.

Darek Wojnar, Head of Funds and Managed Accounts at Northern Trust Asset Management

Darek Wojnar, Head of Funds and Managed Accounts at Northern Trust Asset Management.

The $120 million FlexShares Credit-Scored US Corporate Bond Index Fund (SKOR US) has switched from the Northern Trust Credit-Scored US Corporate Bond Index to the Northern Trust US Corporate Bond Quality Value Index.

The fund’s outgoing index provided exposure to USD-denominated corporate debt issued in the US by firms with investment-grade credit ratings. Eligible issues must have a minimum size of $500m and a remaining maturity between one and ten years.

The index used an optimization process to maximize exposure to Northern Trust’s proprietary credit score (which considers both short-term and long-term insolvency risks) while maintaining risk characteristics (effective duration and option-adjusted spread) similar to the parent universe.

The incoming index also uses an optimization process but aims to maximize exposure to proprietary quality and value scores issued by Northern Trust’s Quantitative Research team while maintaining duration in line with the parent universe. Factor scores are based on several inputs including valuation, spread, solvency, management efficiency, and profitability.

Meanwhile, the $30m FlexShares Credit-Scored US Long Corporate Bond Index Fund (LKOR US) has also adopted a new index, substituting the Northern Trust Credit-Scored US Long Corporate Bond Index for the Northern Trust US Long Corporate Bond Quality Value Index.

The change in strategy is similar to the above. The outgoing index provided exposure to bonds with maturities greater than ten years while optimizing to enhance exposure to proprietary credit scores. The new index optimizes to enhance exposure to quality and value factors.

Each ETF will maintain its expense ratio of 0.22%.

Darek Wojnar, Head of Funds and Managed Accounts at Northern Trust Asset Management, commented, “At FlexShares, our mission is first and foremost to meet investor goals and we’re constantly evaluating how best to align our products with those objectives. In this low-yielding market environment, income generation and capital appreciation are critical for today’s investors. We believe these needs can be most effectively met by prioritizing quality and value.”

Paulami Kar, Head of Product Strategy at Northern Trust Asset Management, added, “By applying a factor-based approach to both our high yield and investment-grade funds, we’re aiming to provide advisors and their clients with a more consistent experience across FlexShares’ fixed income suite. We believe a factor-based strategy focusing on quality and value could be an effective way to build a portfolio of investment-grade bonds in the current market environment.”

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