While consumers grapple with higher prices, fixed income investors are having to contend with rising rates that could eat away at bond income.
There's a plethora of ways that investors can try to contain the effects of rising inflation. One way is to try to beat inflation at its own race or at least mitigate the erosion of income loss.
That said, investors can also try to obtain more yield by taking on riskier debt. Bonds with a higher credit risk can offer attractive yields, but for the more risk-averse investors, quality is needed to ensure stability of income.
Investment-grade corporate bonds can offer an option where investors can get the best of both worlds. They can obtain yield that outperforms safer government debt while also tamping down risk that can be associated with corporate bonds.
Going Long On Corporate Bonds
As mentioned, getting more yield doesn't have to come with the expectation of having to take on the riskiest debt. One notable ETF addresses this dynamic: the FlexShares Credit-Scored US Long Corporate Bond Index Fund (LKOR).
Per the fund description, LKOR seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Northern Trust US Long Corporate Bond Index. The underlying index reflects the performance of a broad universe of U.S.-dollar denominated investment-grade corporate bonds that can potentially deliver a higher total return than the overall investment-grade corporate bond market, as represented by the Northern Trust US Investment Grade Long Corporate Bond Index.
The fund comes with a SEC yield of just above 3%, outperforming safer long-term, benchmark Treasury debt. Investors will have to take on more credit risk with the inclusion of corporate bonds, but LKOR's strategy helps mitigate that risk.
“The construction of the index begins with a securities screen to determine eligible securities,” a FlexShares Fund Focus article notes. “Once all eligible securities have been identified, the index attempts to optimize the exposure to quantitative factors by assigning both a Value Score and Quality Score in order to arrive at a Composite Alpha.”
“Corporate bonds remain an important component of many investors’ fixed-income holdings, offering the potential for diversification and income generation,” FlexShares adds. “Low bond yields and the potential shortcomings of traditional credit scoring methodologies have made pursuing these potential benefits more difficult.”
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