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%.
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.
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- interest rates