Daily ETF Watch: New ‘Smart’ Bond ETF

November 14, 2014

FlexShares, Northern Trust’s ETF unit that’s making a mark in both “smart beta” and self-indexed funds, this week launched a U.S.-focused investment-graded, intermediate-dated corporate bond fund that has an enhanced beta index designed by the firm’s own index shop to lower risks.

The FlexShares Credit-Scored US Corporate Bond Index Fund trades with the ticker “SKOR”—signifying the index’s methodology that screens credits for credit quality, liquidity and other metrics that, in sum, are meant to lower the probability of defaults within the portfolio, according to the new fund’s fact sheet. SKOR has an annual expense ratio of 23 basis points, or $23 for each $10,000 invested.

“Smart beta” ETFs, which are now garnering half of all new inflows into exchange-traded funds, are largely an equities-linked phenomenon and are much less prevalent in the fixed-income space, making SKOR a bit more distinctive. But quasi-active “strategy smart-beta” funds, like the PowerShares Fundamental Investment Grade Corporate Bond Portfolio (PFIG | B-76) that keep clear of debt-laden companies, have been around for a while. They have yet to stoke investor interest in a big way.

The new FlexShares fund has its primary listing on the NASDAQ.

Halted Creations

Separately, on Thursday Deutsche Bank halted creations on two exchange-traded notes that provide exposure to the sovereign Italian debt market: the PowerShares DB 3X Italian Treasury Bond Futures ETN (ITLT) and the PowerShares DB Italian Treasury Bond Futures ETN (ITLY | C).

In a press release that did little to explain the actual reasons why Deutsche decided to halt creations, the company laid out legalistic explanations that the two creation halts could cause the two securities to trade at premiums or discounts to their net asset values.

Industry sources reckon that the creations halt—which precludes further expansion of outstanding shares but doesn’t eliminate those shares already issued—probably has something to do with the relatively small size of the two securities. ITLT, the triple-exposure play on Italian sovereigns, has about $21 million in assets, while the single-exposure ITLY has about $10.5 million.

Outright shutting of ETNs is a bit of a complicated affair, as the securities are not funds like ETFs are, but are debt instruments. Therefore, halting of creations or the triggering of covenants stipulating the conditions under which ETNs might be shuttered are the real-world proxies of shutting ETNs.

It’s likely that Deutsche wants to “cull the herd” of securities it manages, industry sources say.

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