Big Flows Into Floating Rate ETFs

August 13, 2018

Floating-rate ETFs are a tiny corner of the fixed-income ETF market—just 15 ETFs, together representing just 5% of the total assets under management invested in bond ETFs overall. Yet floating-rate ETFs have drawn an outsized proportion of the money flowing into bond ETFs this year.

So far in 2018, investors have poured $57 billion into bond ETFs, of which floating-rate ETFs account for $8.3 billion, or 15%.

That might not sound like much, but the $10.7 billion iShares Floating Rate Bond ETF (FLOT), which has brought in $4.1 billion in new money year-to-date, hasn't seen a single day of net outflows all year:

 

 

In fact, only two bond ETFs have attracted more investor cash than FLOT this year: the iShares Short Treasury Bond ETF (SHV), which has brought in $7.3 billion; and the evergreen iShares Core U.S. Aggregate Bond ETF (AGG), which has brought in $4.7 billion.

Big Flows Into FLRN

FLOT isn't the only floating-rate ETF to see a significant influx of cash in 2018. For example, the $3.7 billion SPDR Bloomberg Barclays Investment Grade Floating Rate ETF (FLRN), which has brought in $2 billion in new net money, has seen only two days of outflows in 2018:

 

Charts sources: ETF.com, FactSet; data as of Aug. 9, 2018

 

Meanwhile, the $3.3 billion SPDR Blackstone / GSO Senior Loan ETF (SRLN) has seen inflows just shy of $1 billion.

What Is A Floating Rate ETF?

Floating rate ETFs are funds that track bonds with a variable "coupon," or the annual interest rate paid by the bond issuer to the bond holder, expressed as some percentage of the bond's face value. (This shouldn't be confused with yield, which is the relationship between a bond's coupon and its current market price—read: "How Do Bond ETFs Work?").

That variable coupon is usually tied to the benchmark interest rates that banks charge each other to lend funds overnight. Typically, that's the Libor or federal funds rate—better known as the "interest rate" that the Federal Reserve can raise or lower at will.

Some variable rate bonds change their coupon (or "reset" it) weekly, while others do it monthly or quarterly.

Because their coupon is flexible, floating-rate ETFs can shield investors significantly from the sting of rising interest rates. So it's only natural that investors would gravitate to these kinds of bond ETFs, as the Fed gradually lifts rates.

Since the post-crisis interest rate hikes began on Dec. 16, 2015, $21.3 billion has flowed into floating-rate ETFs. Roughly one-third of that—$7.2 billion—has gone into FLOT alone, a fund that tracks investment-grade U.S.-dollar-denominated bonds whose coupons are benchmarked to the three-month Libor.

Different Kinds Of Floating-Rate ETFs

Floating-rate bonds aren't the only kinds of debt whose interest rates can change.

Senior bank loans, for example, track a specific kind of debt issued by banks that, legally, is considered the highest-priority loan possible. In case of bankruptcy, these loans must be repaid before anything else. Their interest rates often float alongside the Libor, and they tend to offer higher yields than other floating-rate ETFs (read: "What Kinds Of Bond ETFs Are There?").

Of the six senior loan ETFs on the market today, the largest is the $7.7 billion Invesco Senior Loan ETF (BKLN).

Hybrid equity/fixed-income securities, which blend characteristics of both assets, may also carry variable coupons. Preferred stock, for example, is a type of stock that pays dividends to investors, and it can come in a floating-rate version.

The $2.2 billion Invesco Variable Rate Preferred ETF (VRP) is a fund that specifically tracks floating-rate preferred stock.

The 15 floating-rate ETFs are listed in the table below:

 

Floating-Rate ETFs
Ticker Fund Expense Ratio AUM ($M) Spread YTD Return 12 Month Return Dividend Yield Duration Fund Flows YTD ($M)
FLOT iShares Floating Rate Bond ETF 0.20% 10,690 0.02% 1.51% 2.07% 1.91% 0.14 4,082.24
BKLN Invesco Senior Loan ETF 0.65% 7,730 0.04% 2.22% 2.97% 3.75% 1.66 -249.44
FLRN SPDR Bloomberg Barclays Investment Grade Floating Rate ETF 0.15% 3,670 0.03% 1.47% 2.18% 2.03% 0.14 2,002.08
SRLN SPDR Blackstone / GSO Senior Loan ETF 0.70% 3,320 0.02% 2.36% 3.45% 4.33% -- 975.97
VRP Invesco Variable Rate Preferred ETF 0.50% 2,220 0.07% 0.40% -0.12% 4.66% -- 332.38
FTSL First Trust Senior Loan Fund 0.88% 1,740 0.02% 2.31% 2.84% 3.87% -- 403.26
SNLN Highland iBoxx Senior Loan ETF 0.55% 575 0.07% 2.84% 3.28% 4.36% 0.15 20.06
FLTR VanEck Vectors Investment Grade Floating Rate ETF 0.14% 488 0.04% 1.40% 2.31% 2.51% 0.3 250.25
VRIG Invesco Variable Rate Investment Grade ETF 0.30% 373 0.04% 1.21% 2.01% 4.61% 0.25 155.85
USFR WisdomTree Floating Rate Treasury Fund 0.15% 210 0.04% 1.23% 1.28% 1.46% 0 208.67
TFLO iShares Treasury Floating Rate Bond ETF 0.15% 186 0.03% 0.93% 1.53% 1.39% 0.01 160.74
PVI Invesco VDRO Tax-Free Weekly ETF 0.25% 62 0.24% 0.69% 0.98% -- -- -19.94
FLRT AdvisorShares Pacific Asset Enhanced Floating Rate ETF 1.12% 30 0.70% 1.31% 1.46% 3.36% 0.78 2.47
FLBL Franklin Liberty Senior Loan ETF 0.45% 25 0.22% -- -- -- -- 15.07
YESR Amplify YieldShares Senior Loan and Income ETF 2.30% 5 0.35% 2.27% 1.39% 0.90% 0.01 2.46

Sources: ETF.com, FactSet; data as of Aug. 9, 2018

 

Downside Of Floating-Rate ETFs

The downside of floating-rate ETFs is that they don't offer earth-shattering yields. The average dividend yield for a floating-rate ETF is currently 2.84%, lower than the yield offered by 140 other fixed-income ETFs.

But rate-shy investors are often willing to sacrifice some yield to lower their exposure to interest rates. As the Fed continues to raise rates, floating-rate ETFs essentially allow investors to keep pace with those changes, rather than always trying to adjust their portfolios from a few steps behind.

Contact Lara Crigger at [email protected]

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