The FlexShares Core Select Bond Fund (BNDC) is an ETF that seeks to provide a diversified, core fixed-income portfolio that balances total return and income, while offering price stability and diversification away from equities.

The ETF is actively managed by institutional fixed-income managers at Northern Trust, the adviser of the FlexShares funds. These managers aim to build a diversified bond portfolio through existing ETFs, using both the FlexShares ETF family and ETFs from other providers, to provide exposure across sectors of the fixed income markets.

For example, the Fund captures exposure to the major fixed-income asset classes such as Treasuries, corporate bonds, and mortgage-backed securities (MBS), while also choosing ETFs that offer potentially more refined, value-added exposures to a variety of products such as TIPS.

Northern Trust’s fixed-income team positions the fund strategically and tactically based on:

MORE CONSISTENT RISK EXPOSURE IN AN EFFICIENT VEHICLE

The fund-of-funds model employed by the FlexShares Core Select Bond Fund (BNDC) gives investors access to Northern Trust’s institutional fixed-income expertise. The Fund’s portfolio managers have the ability to change the fund’s duration and risk allocation in response to changes in interest rates or risk levels in various sectors. This ability to make tactical adjustments allows the Fund’s managers to express their current views on the evolution of the fixed-income market, which may help investors capture opportunities while managing risk.

Our belief is that building a portfolio of ETFs also allows managers to make adjustments to the Fund’s composition more efficiently. They can potentially fine-tune the Fund’s duration or sector exposure through a small number of ETF transactions, rather than through dozens of transactions involving individual securities. We believe this efficiency helps keep the Fund’s turnover and fees low.

CONCLUSION

Our opinion is that conventional core bond funds or index-based ETFs may have drawbacks for investors because of their potential reliance on market weighting. Trends in bond issuance may change the weighting of an index in ways that can negatively affect investors’ risk exposure and return potential. What’s more, some investments, like TIPS, aren’t included in some of the broader indices at all.

The FlexShares Core Select Bond Fund (BNDC) combines Northern Trust’s fixed-income expertise with the transparency and potential cost effectiveness often associated with ETFs. As a result, we believe the Fund provides investors an opportunity to participate in the potential upside of an actively managed bond portfolio while enjoying the benefits of an ETF.

FOOTNOTES

1 Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market. This includes Treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities and collateralized mortgage-backed securities.

2 The risk-return profile is an overview of how much the investment risk within the fund or strategy has the chance that the actual value of, or return from, an investment may be less than its expected value or return.

3 SIFMA, https://www.sifma.org/resources/research/fixed-income-chart/. At the end of each year, SIFMA calculates the total outstanding debt within the fixed income market from these categories Corporate Bonds, Mortgage-Backed Securities, Asset-Backed Securities, Federal Agency Securities, Treasury Securities & Municipal Securities beginning of 1996 to end of 2019. Each category is then assigned a percentage within the larger total of the combined categories.

4 Duration is how sensitive your investment or a portfolio is to a change in interest rates. You will often see it expressed as a number of years – the higher the number the more volatile will be the expected change. Historically, rising interest rates have often meant falling bond prices, while declining interest rates have meant rising bond prices.

5 Risk-adjusted yields defines an investment’s yield by measuring how much risk is involved in producing that yield, which is generally expressed as a number or rating.