Consistency and Flexibility With This Short-Term Bond ETF | ETF Trends

Interest rates reside near historic lows, but short-term fixed income instruments still play roles in balanced bond portfolios. The FlexShares Ready Access Variable Income Fund (RAVI) offers that balance with a steady income stream.

RAVI primarily invests in investment-grade debt securities with a heavy tilt toward U.S. corporate bonds. According to the fund prospectus, the ETF may also invest, without limitation, in fixed-income securities and instruments of foreign issuers in developed and emerging markets, including debt securities of foreign governments, and may invest more than 25% of its total assets in securities and instruments of issuers in a single developed market country. RAVI can hold up to 20% of its total assets in fixed-income securities and instruments of issuers in emerging markets.

RAVI holds 277 bonds and puts the short in short-term as its weighted average effective duration is just 0.88 years. In addition to its low rate risk, RAVI can fill voids for investors seeking safety in a volatile climate.

“Volatile headlines regarding the coronavirus pandemic, earnings, jobless claims, an increasingly fraught relationship with China, and civil unrest across the US, influenced market sentiment in May even as investor appetite remained steady,” said Morten Olsen, Northern Trust director of ultra short fixed income, in a recent note. “US and world leaders debated how best to reopen the economy in order to lessen the impact to global economies. In mid-May, Federal Reserve Chairman, Jerome Powell, discussed the lasting damage that the economic closures could have and reiterated that the Fed was not considering taking US interest rates negative, at this time, though Fed Fund futures had begun pricing in negative rates within the next year.”

Getting Right With RAVI

RAVI may be something for investors whom are looking for a little more yield than what’s provided by money market funds, but don’t want to move too far out of the short-duration end of the yield curve. Additionally, RAVI’s recent performance has been solid.

“The FlexShares Ready Access Variable Income fund outperformed its benchmark during the month of May, producing 75 basis points of gross positive alpha,” notes Olsen. “The fund’s outperformance stemmed from its overweight to front-end IG Credit, which continued to move tighter4on outsized demand and improving risk sentiment. The fund’s long duration bias was also additive to performance. In line with Northern Trusts views on future interest rates and general risk markets, the ETF remains marginally overweight IG risk and skewed long duration relative the benchmark.”

Home to $410 million in assets under management, RAVI costs just 0.25% per year, or $25 on a $10,000 investment.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.