A Floating-Rate Bond Fund for the Rising-Yield Environment

Jim Woods

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The VanEck Vectors Investment Grade Floating Rate ETF (FLTR) tracks an index of U.S. dollar-denominated, investment-grade floating-rate notes issued by corporations.

In contrast to its peers like SPDR Barclays Capital Investment Grade Floating Rate ETF (FLRN) and iShares Floating Rate Bond ETF (FLOT) (both of which were covered in previous ETF Talks), FLTR is much smaller, with only $568.05 in assets under management. In addition, FLTR is more tilted towards debt with lower credit ratings by design and many of its bonds are often in the BBB to A- investment grade range. Yet, its yield to maturity of 3.04% somewhat offsets that risk.

Morningstar classifies FLTR as an Ultrashort Bond, because it almost exclusively holds bonds with a duration of less than one year.

With Treasury yields hitting seven-year highs and more Fed rate hikes on the horizon, FLTR could be an effective tool for fixed-income investors to counter the trend. Since FLTR adjusts with rising rates, it gives investors the ability to adapt to the current economic environment. In a statement, VanEck, which manages FLTR, said that as short-term interest rates have climbed, short-term fixed rate bonds have lagged floating rate notes.

Yields on floating rate notes are comparable to fixed-rate short-term bond yields, but with much lower interest rate duration. In addition, floating rate note coupons reset quarterly, adjusting automatically with rates while maintaining a near-zero duration profile, according to VanEck.

FLTR’s one-month return is 0.24%. Year to date, the fund has returned 2.08%. The fund has a relatively low expense ratio of just 0.14% and pays a monthly distribution. FLTR nearly doubled its distribution going from 2017 to 2018. Its last distribution was paid out on Oct. 5 in the amount of $0.0586 and its next distribution date is on Oct. 31.

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FLTR’s holdings are mostly in U.S. corporations. As of Sept. 30, U.S. corporate bonds make up 60% of the fund’s holdings and the next highest exposures by country are Japan, 8.61%; United Kingdom, 6.63%; Australia, 5.65%; and Canada, 4.22%. Top holdings include AT&T, 2.01% of assets; Morgan Stanley, 1.67%; Goldman Sachs, 1.43%; Citigroup, 1.13%; and Wells Fargo, 1.13%.

Investors seeking an inexpensive play in the floating-rate bonds field can consider VanEck Vectors Investment Grade Floating Rate ETF (FLTR) as a potential candidate.

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