by Dan Burrows | October 11, 2012 12:55 pm
Too many folks ignore a simple, critical rule of investing when uncertainty is high and the menu of risk-reward choices is poor. It goes like this:
“Don’t just do something. Stand there!”
After all, sometimes allocating a little something to cash, at least over the short run, is the wisest thing you can do. You’ll get paid almost nothing — but then, return of your principal is always more important than return on your principal.
And if you can grab a smidgen of yield more than your garden-variety money market fund? So much the better.
That’s what makes a new exchange-traded fund from Northern Trust’s (NASDAQ:NTRS) FlexShares ETF business look like a potentially useful tool for anyone looking to minimize risk while maintaining liquidity.
Launched on Thursday, the FlexShares Ready Access Variable Income Fund (NASDAQ:RAVI) is an actively managed ETF that seeks to fill a niche for folks who would otherwise be hiding out in money markets. RAVI holds investment-grade debt securities from around the world — everything from Treasurys to corporate bonds to munis to mortgage securities — but with short durations.
At least 65% of RAVI’s total assets will be held in “a non-diversified portfolio of fixed income instruments, including bonds, debt securities and other similar instruments issued by U.S. and non-U.S. public and private sector entities,” according to the prospectus.
Additionally, up to 20% of total assets could go to fixed-income securities and instruments of issuers in emerging markets, and another 10% is targeted at non-agency mortgage or asset-backed securities.
But the keys of liquidity and low volatility come from sticking to the short end of the yield curve. RAVI’s dollar-weighted average portfolio maturity is not expected to exceed two years. Short-term debt, after all, is more liquid than long-term debt. Meanwhile, changes in interest rates knock around long-term debt much more than issues with shorter maturities.
Ultimately, the goal is to help cash investors maintain liquidity and reach for higher returns, without undue volatility, FlexShares says.
Sounds good to us. After all, bonds are pricey and yield so very, very little. And while stocks have had a remarkable run in 2012, they feel like they could roll over in the blink of an eye. Heck, through fits and starts, the S&P 500 has shed 1.6% since peaking a month ago. The Nasdaq’s lost more than 3% since it likewise topped on Sept. 13.
When even your dependable dividend stocks are at risk of price depreciation and your bonds are subject to interest-rate risk, allocating to cash until you getter a better bead on where things are headed isn’t a bad idea.
And with money markets throwing off an average of 0.49%, any extra yield is more than welcome. True, RAVI’s net expense ratio of 0.25% is going to take a nip out of your return, but considering that it’s also actively managed, that’s a competitive, passive-type fee.
If RAVI can offer the stability and liquidity of a money market but with an appreciably higher yield, investors should get what they’re paying for.
As of this writing, Dan Burrows held no positions in any of the aforementioned securities.
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