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.