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 (NYSEArca: 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 (NYSEArca: FLRN) and Market Vectors Investment Grade Floating Rate (NYSEArca: 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.
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