Investors looking to move beyond government debt with floating rate bond funds can look to ETFs like the SPDR Barclays Investment Grade Floating Rate (NYSEArca: FLRN).
FLRN follows the Bloomberg Barclays U.S. Dollar Floating Rate Note < 5 Years Index, which “seeks to provide exposure to debt instruments that pay a variable coupon rate, a majority of which are based on the 3-month LIBOR, with a fixed spread,” according to State Street Global Advisors (SSgA).
FLRN’s 669 holdings include investment-grade bonds with a floating rate component, which automatically adjust at periodic intervals in response to changes in the interest rates.
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.
Key Facts About ‘FLRN’
FLRN’s option-adjusted duration is just 0.09 years, indicating the fund offers reduced sensitivity to rising Treasury yields. Even with that benefit, FLRN’s current yield of 2.92% is decent. The fund is nearly seven years old and has $3.42 billion in assets under management.
“Securities in the Index must have a maturity of more than one month and less than five years, and $300 million or more of outstanding face value,” according to SSgA.
FLRN rebalances on the last business day of each month.
Related: The Fed is Holding Down Long End of Yield Curve
As a result of the safe and conservative nature of floating rate bonds, investors should not expect high yields. Nevertheless, Treasury money market funds are so starved for yield that anything with an extra basis point or two and the quality and liquidity of a Treasury security will provide an attractive alternative.
Credit risk is minimal with FLRN as over 69% of the fund’s holdings are rated AA or A. Over 19% carry a Baa rating.
FLRN charges 0.15% per year, or $15 on a $10,000 investment.
For more on the bond market, visit our Fixed Income Channel.