A Fixed-Income ETF to Balance Risk Management, Income Generation in Today's Market | ETF Trends

There are challenges in today’s market environment, but fixed-income investors could consider an alternative bond exchange traded fund strategy to meet this uniquely unruly market.

In the recent webcast, Managing Fixed Income Allocations During Turbulent Times, Bilal Memon, portfolio manager at Northern Trust Asset Management, highlighted the ongoing hurdles that many investors face today. For instance, supply constraints and rising broad-based inflation have kept inflation well above the Federal Reserve’s target. The coronavirus pandemic persisted longer than many expected, but growth is likely to remain positive.

Looking ahead, the market is pricing in roughly nine interest rate hikes throughout the year. The yield curve moved materially higher and inverted as market participants assessed the path of monetary policy. Additionally, credit spreads widened due to inflation, growth outlook, and geopolitical risks.

As a way to help investors better navigate the current fixed-income environment, Memon highlighted the FlexShares Ready Access Variable Income Fund (RAVI), a short-term debt strategy that is an ideal fit for investors who want to preserve capital while generating a little more income on the side.

RAVI is “designed to bridge the gap between cash and short duration investing while preserving principal,” Memon said.

RAVI offers investors a vehicle with stronger return potential than money market funds while retaining the liquidity necessary to hold funds for use in near-term investment decisions. Taking advantage of Northern Trust’s expertise in the fixed income markets, the fund may fill a gap between money market funds and short-term bond funds. The ETF is designed to provide investment liquidity, minimum principle volatility, and the potential for higher returns.

“We seek alpha by actively managing duration, yield curve positioning, sector allocation, and security selection — maximizing return opportunities and mitigating risk,” Memon said.

The portfolio is based on fundamental research and relative value analysis to identify the highest return potential securities. The robust investment process emphasizes macro analysis, credit research, and risk management. Specifically, macroeconomic themes include leading indicators, economic and market trends, political developments, interest rate expectations, monetary and fiscal policy, and regulatory changes. Meanwhile, the credit research process includes credit fundamentals, relative value analysis, credit rating expectations, proprietary internal rating, independent security approval before purchase, business cycle, and issuance trends.

“FlexShares Ready Access Variable Income Fund (RAVI) takes advantage of Northern Trust’s expertise to offer investors a vehicle with stronger return potential than money market funds while retaining the liquidity necessary to hold funds for use in near-term investment decisions,” Memon added.

Financial advisors who are interested in learning more about fixed-income strategies can watch the webcast here on demand.