Exchange Traded Funds (ETFs)

This Fund Could Counter Fed’s Inevitable Rate Hike

The VanEck Vectors Investment Grade Floating Rate ETF (FLTR) is an exchange-traded fund (ETF) that concentrates its holdings in U.S. corporate issues through slightly riskier debt than typical investment grade issues.

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. But that additional credit risk is somewhat mitigated by higher yield to maturity (YTM).

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 $620 million in assets under management. Morningstar classifies FLTR as an Ultrashort Bond because it almost exclusively holds bonds with a duration of less than one year. AA, A and BBB bond ratings comprise 98.82% of this ETF.

FLTR was described as an effective investment in September when the Fed began talking about raising interest rates. As we saw, the Fed had increased the federal funds rate from 2% to 2.25% at the end of September and very likely will increase it again it to 2.5% in December.

With that said, investing in FLTR could be yet another effective investment to counter the Fed when it raises interest rates. Bond investors ought to consider incorporating fixed income ETFs like these in their portfolios.

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.

The fund has a 2.14% one-year total return. FLTR has a relatively low expense ratio of just 0.14% and pays a monthly distribution. FLTR nearly doubled its distribution from 2017 to 2018. Its last distribution was paid out on Oct. 31 in the amount of $0.0583 and its next distribution date is on Nov. 30.

Chart courtesy of stockcharts.com

FLTR’s holdings are mostly in U.S. corporations. As of Nov. 6, top holdings include AT&T (T), 1.99% of assets; Morgan Stanley (MS), 1.68%; Goldman Sachs (GS), 1.45%; and JPMorgan Chase & Co. (JPM), 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.

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 Intelligence Report, Investing Edge, 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.