Benchmark Treasury yields may be on the rise, but fixed income investors don’t have to fret when funds like the VanEck Vectors Investment Grade Floating Rate ETF (FLTR) can help keep them afloat.
“Fixed-income investors are in a tough spot. Treasury yields have been rising, and that has led to losses in fixed-rate bonds,” a Barron’s article noted. “But Treasury prices haven’t sold off enough yet to make those bonds attractive as a source of yield.”
“This year’s bond-market losses have come primarily from bonds with high durations, a metric of interest-rate sensitivity that is related to (but not the same as) a bond’s maturity,” the article added.
As such, FLTR can be the perfect counterbalance when it comes to rising yields. The fund seeks to replicate as closely as possible the price and yield performance of the MVIS® US Investment Grade Floating Rate Index, which is comprised of U.S. dollar-denominated floating rate notes issued by corporate entities or similar commercial entities that are public reporting companies in the United States and rated investment grade.
Overall, FLTR gives investors:
- Potential to Benefit from Rising Rates: Floating rate notes have variable coupons that reset periodically.
- Investment Grade Credit Quality: The underlying index is comprised of a non-leveraged portfolio of investment grade floating rate corporate bonds.
- Near-Zero Duration with Enhanced Yield Potential: Floating rate notes may offer higher yields than other short duration instruments.
FLTR Can Ease the Inflationary Tension
In addition to traditional bond exposure, FLTR can be used as a hedge against inflationary pressures. All eyes will be on the Federal Reserve for the next interest rate moves, but FLTR can help alleviate the possibility of rate hikes.
“This fund can also be useful for investors looking to fine tune fixed income exposure in certain environments,” an ETF Database analysis said. “Whereas most bond ETFs invest exclusively in debt that pays a fixed coupon over the life of the note, this ETF holds debt that adjusts its coupon payment based on a reference rate. As a result, there is minimal interest rate risk associated with this fund, as the effective duration is close to zero. That makes FLTR appealing for investors who believe that interest rates are headed higher (rate hikes generally have an adverse impact on the price of fixed rate bonds).”