Exchange Traded Funds (ETFs)

A Fund that Focuses on U.S. Dollar-Denominated Assets

The SPDR Bloomberg Barclays Investment Grade Floating Rate ETF (FLRN) is an exchange-traded fund (ETF) that focuses on securities that have between one month and five years until maturity.

FLRN tracks an index of U.S. dollar-denominated, investment-grade floating notes. Investing in this fund exposes the investor to floating-rate notes that are spread around the world (since U.S. issues make up a little more than half of the FLRN’s debt holdings) and have a low expense ratio.

The fact that the portfolio is full of floating-rate notes means that the value of the notes will be less affected by changes in the interest rate. As a result, investing in FLRN or a similarly structured ETF might be a wise idea at a time when the Federal Reserve has decided to finally increase interest rates.

Indeed, the Fed had increased the federal funds rate from 2% to 2.25% at the end of September and will very likely increase it again it to 2.5% in December. Given that the last increase caused a panic on Wall Street and a plunge in the value of many stocks, it is conceivable that some prospective investors might want to consider a fund that is less vulnerable to interest rate changes.

Furthermore, FLRN’s portfolio has the indications of being a strong portfolio since the majority of this portfolio’s assets are in AAA, AA or A backed securities and there are no assets invested in what have been popularly called “junk bonds.” In terms of sector, FLRN is most heavily invested in financial institutions, then industry, then supranational organizations and then agencies. Not surprisingly, most of its funds are in corporate bonds from issuers such as Morgan Stanley (NYSE:MS), the Inter-American Development Bank (NYSE:ITAD), Goldman Sachs (NYSE:GS), the Asian Development Bank (NYSE:ATB) and the UBS AG London Branch (NYSE:AG).

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It is also important to note that the fund currently has $4.49 billion in assets under management, has a $41.83 million average daily trading volume and has an average 60-day spread of 0.03%. It also has an expense ratio of 0.15%, meaning that it is relatively cheap to hold in comparison to other exchange-traded funds.

The returns from FLRN’s holdings have been weaker than the segment benchmark over the course of the past three years. For instance, FLRN’s holdings have grown 2.12% over the course of the last year, but the Bloomberg Barclays U.S. Floating Rate Note Index has risen 2.39% over the same period.

In short, while FLRN does have several advantages over some of its peer funds, its risks are not zero. Interested investors should, as always, do their due diligence and decide whether the fund is suitable for their portfolios.

Chart Courtesy of stockcharts.com

I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.

Jim Woods

Jim Woods is a 20-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor. Jim is the editor of Successful Investing, the Bullseye Stock Trader, and The Deep Woods (formerly the Weekly ETF Report). His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. His articles have appeared on many leading financial websites, including StockInvestor.com, InvestorPlace.com, Main Street Investor, MarketWatch, Street Authority, Human Events and many others. Jim formerly worked with Investor’s Business Daily founder William J. O’Neil, helping to author training courses in the CANSLIM stock-picking methodology. The independent firm TipRanks rates Jim the No. 3 financial blogger in the world (out of more than 6,000). TipRanks calculates that, since 2012, he's made 361 successful recommendations out of 499 total, earning a success rate of 72% and a +15.3% average return per recommendation. He is known in professional and personal circles as “The Renaissance Man,” because his expertise includes such varied fields as composing and performing music; Western horsemanship, combat marksmanship, martial arts, auto racing and bodybuilding. Jim holds a BA in philosophy from the University of California, Los Angeles, and is a former U.S. Army paratrooper. A self-described “radical for capitalism,” he celebrates the virtue of making money from his Southern California horse ranch.