FlexShares Introduces Enhanced Money Market ETF

FlexShares Ready Access Variable Income Fund (NYSEARCA:RAVI) was listed for trading on October 11, 2012.  It is an actively managed ETF that attempts to preserve capital, maintain liquidity, and reach for higher returns without undue volatility.  RAVI features a variable net asset value (NAV) and can invest beyond the limitations of a traditional money market fund.  The portfolio consists of investment grade debt from around the world, including public and private sector securities.

RAVI currently has 18 holdings with the largest exposures being Citigroup Money Market 56.8%, Daimler Finance North America 6.7%, JPMorgan Chase 4.1%, Svenska Handelsbank/NY 4.0%, IBM 4.0%, and Teva Pharmaceutical 3.6%.  The country breakdown consists of U.S. 74.4%, Israel 9.6%, Switzerland 8.9%, and Netherlands 7.1%.

Yield information is not available at this time.  RAVI’s current portfolio has an effective duration of 0.47 years and an average maturity of 0.74 years.  However, more than half of the portfolio is in money market, and these characteristics will change if the managers do not keep that allocation.

The new ETF has an expense ratio of 0.25%, and additional information is available in theoverview, fact sheet (pdf), and prospectus (pdf).

Analysis/Opinion: The category of “enhanced money market” can be a tough nut to crack because these funds lack the defining characteristics that make traditional money market funds so popular.  The desirable features of a constant $1.00 NAV, no transaction fees, and the ability to be used for automatic daily sweeps of cash all go away with this ETF format.  Investors must make a conscious decision to buy and sell shares, pay commissions, and otherwise treat enhanced money market funds as short-term bond ETFs, which is what they are.

Given the fund’s objective, I would assume that all holdings would be denominated in U.S. dollars to avoid any currency fluctuations.  However, that appears to be a bad assumption as RAVI’s prospectus does not include this constraint and identifies foreign currency exposure as a specific risk.

RAVI’s most direct competition appears to be PIMCO Enhanced Short Mat Str Fund (NYSEARCA:MINT), which is also an actively managed ETF.  With 634 holdings, it is a much more diversified offering, but it also has a higher 0.35% expense ratio.  MINT has an effective duration of 1.00 year, a yield of 0.8%, and a return of about 2.7% the past year.  Its maximum drawdown has been 1.1%.

Additionally, there are indexed short-term corporate bond ETFs that investors should consider.  They tend to have higher yield, more interest rate risk (increased duration), and don’t market themselves as enhanced money market funds.  Examples include:

• SPDR Barclays Cptl Shrt Term Corp Bd (NYSEARCA:SCPB) has a 0.12% expense ratio, an effective duration of 1.9 years, a yield of 0.9%, a maximum drawdown of 1.4%, and a total return of 3.8% the past year (SCPB overview).
• Vanguard Short Term Corporate Bond (NASDAQ:VCSH) has a 0.14% expense ratio, an effective duration of 2.8 years, a yield of 1.2%, a maximum drawdown of 2.0%, and a total return of 6.5% the past year (VCSH overview).

This article was originally written by Ron Rowland, and posted on InvestWithAnEdge.