FlexShares enters actively managed ETF space with short-maturity money market alternative

Oct 12th, 2012 | By | Category: Fixed Income

FlexShares Exchange Traded Funds, sponsored and managed by Northern Trust, has launched its first actively managed ETF, the FlexShares Ready Access Variable Income ETF (RAVI).

FlexShares enters actively managed ETF space with short maturity money market alternative

FlexShares has entered the actively managed ETF space with the launch of a short-maturity money market alternative fund.

Designed for liquidity-focused investors seeking higher yields, the cash management fund has a variable net asset value (NAV) and can invest beyond the limits of traditional money market funds.

Cash funds face many challenges including historically low interest rates, a shrinking supply of eligible securities, greater demand for these securities and uncertainty in regulation. All of these factors have made it difficult for investors to find a liquid cash investment with a competitive investment return.

By leveraging the cash management heritage of Northern Trust while utilising the operational and trading benefits of an ETF and a variable NAV strategy, the FlexShares Ready Access Variable Income ETF seeks to maintain liquidity and maximise current income, while preserving capital and avoiding undue volatility.

The fund seeks to do this by investing at least 65% of its total assets in a non-diversified portfolio of quality fixed income instruments, including bonds, debt securities and other similar instruments issued by US and non-US public and private sector entities.

Such issuers include US and non-US governments and their agencies, instrumentalities or sponsored enterprises, US state and local governments and US and non-US private-sector entities, such as corporations and banks.

Commenting on the launch, Shundrawn Thomas, head of Northern Trust’s ETF Group, said: “Investors in cash products face a tradeoff between safety of principal, income and liquidity given today’s ultra-low rate environment. 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.”

The fund invests in what Northern Trust believes are fundamentally sound corporate, sovereign and asset-backed securities, including those that fall beyond the SEC Rule 2a7 restrictions imposed on registered fixed NAV money market funds (Rule 2a7 puts limits on the quality, maturity and diversity of investments in money market funds). Holdings are evaluated with regard to their relative value for credit and market risk before being included in RAVI’s portfolio.

The fund is listed on the NYSE Arca and comes with a annual Net Expense Ratio of 0.45%

In terms of competitors, the fund is likely to come up against the NYSE-listed PIMCO Enhanced Short Maturity Strategy ETF (MINT), a similarly actively managed short-duration investment-grade fixed income fund, which has attracted over $2 billion in assets.

UK and European investors looking for a money market alternative could consider one of the products within the Pimco Source “Short Maturity” suite. These include the Pimco Sterling Short Maturity Source ETF (QUID), the Pimco US Dollar Short Maturity Source ETF (MINT) and the Pimco Euro Short Maturity Source ETF (PJSI).

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