The subject of corporate bond liquidity remains top of mind with bond funds and ETFs adapting to address the issue. For example, SKOR has removed illiquid, orphaned and small lot names from the index to mitigate liquidity risk. In contrast, Overbond utilizes machine learning in a 3-tiered liquidity script to price even the most illiquid of issues. Use Overbond’s liquidity-adjusted pricing to screen for the best performing bond ETFs.
Source: ETF Trends
Plenty of familiar investment-grade corporate bond ETFs are getting lots of attention these days thanks to the Federal Reserve buying some of these funds, but investors should let that commotion overshadow some hidden gems, including the FlexShares Credit‐Scored US Corporate Bond Index Fund (NasdaqGM: SKOR).
SKOR tracks the Northern Trust Credit-Scored US Corporate Bond Index, which focuses on issues from companies with quality characteristics such as strength in management efficiency, profitability, and solvency, according to FlexShares.
Bond funds hold a collection of debt with varying maturities, buying and selling debt securities to maintain their short-, intermediate- or long-term strategy. When it comes to bond ETFs, investors should look at the duration, or a bond fund’s measure of sensitivity to gauge their investment’s exposure to changes in interest rates – a higher duration means higher sensitivity to shifts in rates.
Meanwhile, the Fed’s holdings of ETFs that invest in corporate bonds rose by $1.3 billion to $3.1 billion for the asset category, according to adjusted figures. The corporate bond ETF purchases are part of the Fed’s broader plan to support the secondary market for corporate debt, and it is only getting started. A second facility for purchasing corporate debt directly from issuers has yet to be implemented.
Data confirm the “Fed backstop” is important to the investment-grade corporate bond market.
“The Fed’s unprecedented creation of a backstop for U.S. investment-grade corporate bonds helped to prompt a substantial lowering of investment-grade bond yields and spreads from their March highs,” said Moody’s. “After peaking at March 20’s 4.58%, Bloomberg/Barclays US$-denominated investment-grade corporate bond yield has since declined to April 29’s 2.69%, where the latter is less than each of its month-long averages starting with May 2013 and ending with January 2020. By contrast, the month-long average of this IG corporate bond peaked at November 2008’s 8.60%, which exceeded each of its preceding month-long averages back to December 1994’s 8.65%.”
SKOR’s scoring methodology indicates the fund is appropriate for a broad swath of investors, including those looking to reduce risk.
“The FlexShares Credit Scoring Model addresses the corporate bond liquidity challenge by optimizing a carefully selected subset of all credit issuers of which illiquid, orphaned and small lot names have been removed,” according to FlexShares.