Among the first pioneers in the short-duration exchange traded funds space, the actively managed FlexShares Ready Access Variable Income Fund (RAVI) offers investors a compelling combination of income generation and risk management.
The fund 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 is currently heavily allocated to short-term corporate bonds, but it also features modest weights to mortgage-backed securities, government debt and cash. Over 96% of RAVI’s holdings have maturities of up to one year or one to three years.
Short-Term RAVI Relevance
Bond investors who are wary of dipping too far into junk bond territory but want better yield payouts than Treasuries may consider investment-grade corporate bond exchange traded funds.
The ongoing low-yield environment and improving economic sentiment has helped push investors toward corporate debt. However, potential investors should be aware that corporate bonds have historically exhibited grater volatility than U.S. Treasuries due to the increased volatility in corporate cash flows and credit risks, along with greater liquidity risks.
Institutional and individual investors, financial advisors and corporate treasuries, among others, still expect to find ways to maintain their principle while generating some extra yield with their cash positions. Some have ventured further away from the ultra-conservative plays and looked to so-called short-term bond funds with an effective duration of about one-and-a-half years.
In addition to seeking yield, RAVI minimizes volatility in the bond markets with lesser duration. Investors witnessed firsthand how bond markets can move amid the coronavirus pandemic, which saw a scramble to safe haven assets like bonds.
RAVI yields 2.14%.
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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.