Floater ETF Hauls in Over $2 Billion on Rising-Rate Fears

ETF Trends

An ETF that tracks floating-rate notes has become a popular option for bond investors seeking to protect themselves against the damaging impact of higher interest rates.

The iShares Floating Rate Bond ETF (FLOT) has brought in fresh assets of nearly $2.4 billion so far this year, according to IndexUniverse flow data.

FLOT’s benchmark measures the performance of U.S. dollar-denominated, investment-grade floating rate notes. The securities in the index have maturities between one month and five years.

The notes pay a variable coupon rate, a majority of which are based on the 3-month London Interbank Offer Rate or LIBOR, with a  fixed spread, according to the fund’s prospectus.

Floating-rate notes come with lower yields than fixed notes of the same maturity. However, floating-rate notes provide protection against rising interest rates, and that explains FLOT’s significant inflows this year.

FLOT holds about $2.8 billion of assets. The fund charges an expense ratio of 0.20%.

Other ETFs in the category includeSPDR Barclays Capital Investment Grade Floating Rate (FLRN) and Market Vectors Investment Grade Floating Rate (FLTR).

Bank loan ETFs, which invest in floating-rate bonds, have also seen hefty inflows this year. [Bank Loan ETFs Still in the Groove as Interest Rates Rise]

“As interest rates have risen over the past few months, investors have sold bond funds, particularly those with a lot of interest-rate risk, and opted instead for bond funds with shorter duration,” says Morningstar ETF analyst Michael Rawson.

The opinions and forecasts expressed herein are solely those of John Spence, 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.

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