FlexShares LKOR: A High-Yield Play in Corporate Bonds

The FlexShares Credit-Scored US Long Corporate Bond Index Fund (LKOR) has emerged as a compelling option for income-focused investors, recently declaring a monthly distribution of $0.2010 on February 3, 2025. This dividend, paired with an annualized yield of 5.73% as of May 2025, positions LKOR as a standout performer in the corporate bond space. But what drives its appeal, and how does it balance risk with reward? Let’s dive into the details.

Distribution and Yield: A Steady Income Stream

LKOR’s monthly distribution of $0.2010 (declared February 3, 2025) aligns with its strategy of providing consistent income. Over the past year, the fund has maintained a 5.7% trailing 12-month yield, slightly below its May 2025 forward yield of 5.73%, but still competitive with peers like the iShares 10+ Year Investment Grade Corp Bond ETF (LQD) at 5.25%. The fund’s dividend growth rate of 5.9% over the past year also signals resilience in a volatile bond market.

The Fund’s Strategy: Quality Over Quantity

LKOR tracks the Northern Trust US Long Corporate Bond Quality Value Index, which selects bonds based on three pillars:
1. Creditworthiness: Issuers must meet minimum Baa3/BBB- ratings.
2. Value: Bonds with attractive spreads relative to risk.
3. Diversification: A portfolio of 833 holdings, with top 10 holdings constituting just 5.68% of assets, minimizing concentration risk.

This approach aims to maximize yield while minimizing default risk. The fund’s focus on long-maturity bonds (10+ years) inherently comes with higher interest rate sensitivity, but its monthly rebalancing helps adapt to shifting market conditions.

Key Risks to Consider

While LKOR’s yield is enticing, investors must weigh its risks:
1. Interest Rate Risk: With a 20-day volatility of 23.15%, rising rates could depress bond prices. The fund’s beta of 0.42 suggests lower volatility than the market, but long-duration bonds remain sensitive to rate hikes.
2. Tracking Error: As a sampled index fund, LKOR may deviate from its benchmark due to portfolio turnover, potentially impacting yield consistency.
3. Expense Cap Expiration: The fund’s 0.15% expense ratio (capped until March 2025 via an adviser reimbursement agreement) may rise afterward, eating into returns.

Performance and Market Positioning

Despite its high yield, LKOR’s year-to-date return of -0.46% (as of May 2025) lags its peer segment average of -0.12%, signaling some underperformance in price appreciation. However, its 5.73% yield compensates income seekers for this shortfall. Investors should note that dividends are taxed as ordinary income, and there’s no guarantee of returns of capital.

Why LKOR Stands Out

• Cost Efficiency: Its 0.15% expense ratio is a fraction of the long-term bond category average (0.80%), making it a budget-friendly option.
• Structured Diversification: Over 800 holdings reduce issuer-specific risk, unlike concentrated bond funds.
• Proprietary Index: The Northern Trust methodology combines credit quality and value metrics, aiming to avoid overvalued or risky bonds.

Conclusion: A High-Yield Pick for Patient Investors

FlexShares LKOR delivers a 5.73% yield with a disciplined approach to corporate bond selection, making it a solid income generator. Its low expense ratio and diversified portfolio are clear advantages, though investors must acknowledge risks like interest rate exposure and the pending expiration of its expense cap.

For those prioritizing steady dividends and willing to navigate bond market volatility, LKOR offers a compelling entry point. However, monitor the fund’s NAV performance post-March 2025 (when its expense cap expires) and stay vigilant about rising rates. Pair it with shorter-duration bonds or Treasury ETFs to balance risk.

In a landscape where yield-hungry investors are often forced to trade income for safety, LKOR strikes a pragmatic middle ground—provided you’re ready to ride the market’s ups and downs.

Data as of May 2025. Past performance does not guarantee future results.