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Fun With Floating Rate ETFs

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Fun With Floating Rate ETFs

Although interest rates in many developed markets remain low, and in some cases negative, investors continue to look for somewhere to stash their cash, regardless of anemic interest rates. Resultantly, bond funds continue to thrive. One overlooked bond investment option some individuals might want to consider is floating rate securities. These securities offer periodically resetting interest payments, with rates tied to a representative interest rate index, according to InvestingInBonds.

Floaters, as these securities are often called, offer another benefit. They often have short durations, which significantly reduces exposure to the risk of rising interest rates. Interest paid on floaters is not compounded, but many do pay make monthly payouts, helping boost the allure of these products for income investors.

Related Link: Corporate Bond ETFs Remain Popular

ETFs And Floaters

There are several exchange-traded funds devoted to floating rate notes, including the iShares Floating Rate Bond ETF (NYSE: FLOT). The $4.7 billion FLOT tracks the Bloomberg Barclays US Floating Rate Note < 5 Years Index and is CFRA Research's focus ETF for the month of March.

Fleshing Out The FLOT Profile

“Overall, FLOT ranks among the top 25 percent of the fixed income ETF universe followed by CFRA. While there are fewer fixed income ETFs than equity ones available, investors have been shifting an increasing amount of their assets into low-cost bond products. Among the benefits of fixed income ETFs that seek to track a benchmark are that they can help to provide liquidity and transparency to investors at a modest expense. We have research on 129 fixed income ETFs with a gross expense ratio of 0.25 percent or lower, including FLOT (0.20 percent),” said CFRA in a note out Wednesday.

FLOT's low effective duration makes it an ideal pick for investors concerned about the erosive effect rising interest rates have on bonds and some fixed income ETFs.

At the end of January, FLOT offered a 30-day SEC yield of 1.1 percent. While this is relatively low for a bond ETF, we think FLOT has strong credit quality and an extremely low duration. FLOT has 40 percent of its assets in bonds rated A or equivalent, 23 percent in bonds rated AA and 15 percent in bonds rated AAA; most of the remainder of its holdings is in bonds for which we do not have ratings information. This high credit quality is coupled with very low duration of just 0.13 years, meaning that a 100 basis point rise in rates would hurt the ETF's price by just 13 basis points,” said CFRA.

The research firm has an Overweight rating on FLOT, the highest rating it applies to ETFs.

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