Many investors out there seeking strategies to help fund their goals tend to turn to cash strategies like Treasury bills, due to their lower volatility. However, are Treasury bills necessarily the best choice for goals-focused investors? Yes, Treasury bills do offer relatively safe tax-advantaged returns, making them a good choice for low-risk strategies. However, for goals-based approaches with specific time horizons, Treasury bills do suffer from one particular complication: reinvestment risk.
If an investor has a 10-year goal, but invests their money in 3-month T-bills, they would need to reinvest that money into new T-bills dozens of times across that 10-year period. Those gaps within the periods in which the yield rolls over into the next T-bill can ultimately lead to a funding outcome dispersion, as well. This problem should not come as a particular surprise — aligning short-term T-bills to with one’s specific goal is extremely difficult.
MUNB: A Laddered Route to Navigate Reinvestment Risk
Instead of trying to make T-bills fit a role they weren’t necessarily designed to do, opting for a laddered portfolio of municipal bonds might do the trick. As an example, take a look at how the (MUNB ) goes about executing its strategy.
MUNB constructs a laddered portfolio of high-quality municipal bonds that are duration-aligned, with a rung representing each year through 2035. As such, its investors get to minimize default risk through bond quality. Meanwhile, they don’t need to worry about the reinvestment risk present in a T-bill strategy.
Compared to traditional bond ladder funds, distributing ladder ETFs like MUNB handle their principal differently. When a bond in a laddered portfolio hits maturity, its principal is traditionally reinvested in a later rung. However, for distributing ladder ETFs, that principal is distributed back to investors on an annual basis. This gives investors access to a duration-aligned means for aiming to ensure they reach their crucial financial goals.
This approach encompasses how MUNB rises above other low-risk strategies for helping investors fund their goals. The fund’s transparent portfolio, income generation, and clear-cut duration make it easy for investors to understand what to expect. Meanwhile, it aims to help them make sure they’re on track to hit those critical financial milestones.
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Disclosures:
ETF investing involves risk, and principal loss is possible. Shares of any ETF are bought and sold at market price (not NAV). They are not individually redeemed from the ETF. Brokerage commissions will reduce returns. The net asset value of the Northern Trust ETFs will decline over time as income payments are made to shareholders. Individual bonds carry an obligation to fully return principal to investors at maturity, however ETFs have no such obligation.
Before investing, carefully consider the investment objectives, risks, charges, and expenses. This and other information is in the prospectus and a summary prospectus, copies of which may be obtained by visiting www.flexshares.com. Read the prospectus carefully before you invest.
Northern Funds Distributors, LLC, distributor. Northern Funds Distributors, LLC and FlexShares are not affiliated with Northern Trust.
All investments are subject to investment risk, including the possible loss of principal amount invested. Investments do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.
Not FDIC insured | May lose value | No bank guarantee