FlexShares, Northern Trust’s ETF unit, today is rolling out an actively managed short-duration fixed-income ETF that looks to minimize investor exposure to interest-rate risk by focusing on the short end of the maturity curve in a way that's similar to the Pimco Enhanced Short Maturity Strategy ETF (MINT).
The FlexShares Ready Access Variable Income Fund (RAVI) is designed to generate current income as well as to preserve capital and liquidity, the company said in its most recent prospectus filed with U.S. regulators. The fund will consist primarily of investment-grade fixed-income securities from both domestic and foreign issuers with average portfolio duration pegged at less than a year.
The shorter the duration, the less sensitive the ETF is to changes in interest rates, something that has become an increasingly attractive feature to investors who are bracing for higher rates—as well as inflation—once the market is weaned off the government’s quantitative easing measures.
Ultra-short bond funds are a good proxy for money market funds, although they can be riskier even if they still have minimal sensitivity to interest-rate changes. But they also often deliver higher yields than money market funds, something that makes them attractive in the current environment of near-zero interest rates.
“Investors in cash products face a trade-off between safety of principal, income and liquidity given today’s ultra-low rate environment,” Shundrawn Thomas, head of Northern Trust’s ETF group, said in the press release. “Going forward, investors will have to segment their cash portfolios on this basis and determine what products fit their needs. We believe RAVI can be used to achieve liquidity and relative higher yields for investors that can accept some degree of variability in their principal.”
Other ETF providers such as State Street Global Advisors, iShares and AdvisorShares have recently taken to the short- and ultra-short duration debt portfolios as a way of catering to risk-averse investors. Perhaps the most popular fund in the space is the Pimco’s MINT, which has gathered nearly $2.0 billion in nearly three years, and has an expense ratio of 0.35 percent.
RAVI will be FlexShares' seventh ETF. The fund sponsor launched its first exchange-traded funds a bit more than a year ago, and now has about $1.7 billion in total ETF assets under management.
RAVI’s portfolio duration should typically be less than one year, but will be based on Northern Trust’s interest rates forecast, the company said in the prospectus. The dollar-weighted average portfolio maturity should be below two years.
As much as 20 percent of the fund may be allocated to emerging markets debt and 25 percent of the portfolio may be tied to debt from a single developed country. Nonagency mortgage- or asset-backed securities may not represent more than 10 percent of the total mix.
RAVI may also rely on forward foreign currency transactions as a way to hedge currency fluctuation exposure.
Northern Trust Investments is the investment advisor for the ETF, with vice presidents Mike Doyle, Peter Yi and Bilal Memon serving as portfolio managers.
RAVI will come with a 0.25 percent expense ratio, according to the prospectus.
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