Manage Duration Risk With This Floating Rate ETF

With the Federal Reserve continuing its rate tightening regime in 2018, fixed income investors have been embracing lower duration ideas, including floating rate notes. Floating rate notes, also known as “floaters,” are accessible via an array of exchange traded funds, including the SPDR Blmbg Barclays Inv Grd Flt Rt ETF (NYSEArca: FLRN).

FLRN seeks to provide investment results that correlate with the price and yield performance of the Bloomberg Barclays U.S. Dollar Floating Rate Note < 5 Years Index. FLRN limits duration exposure with investments in debt securities with maturities that don’t exceed five years. In addition, at least 80% of its assets will be allocated towards securities comprising the index, such as  U.S. dollar-denominated, investment grade floating rate notes. The floating rate allows investors to capitalize on any short-term interest rate adjustments in accordance with monetary policy.

Floating rate notes, like the name suggests, have a floating interest rate. Specifically, the notes’ have a so-called reset period with interest rates tied to a benchmark, such as the Fed funds, LIBOR, prime rate or U.S. Treasury bill rate. Due to their short reset periods, these floating rate funds have relatively low rate risk.

How FLRN Helps

“With rates rising and record high duration risk, we favor short duration corporate exposures and floating rates structures to lower interest rate sensitivity and deliver a more optimal yield and duration profile,” said State Street in a recent note.

The $4.28 billion FLRN has an option-adjusted duration of just 0.10 years. FLRN’s 30-day SEC yield is 2.93%. Data suggest floating notes have been steady performers as interest rates have climbed over the past few years.

“Since the Federal Reserve began hiking rates more regularly in December 2016, floating rates exposures have had lower drawdowns among all the segments and a higher Sharpe ratio compared to the previous 10 years when rates were declining or flat,” according to State Street.

Investors have added $2.65 billion to FLRN this year.

For more trends in fixed income, visit the Rising Rates Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.