Van Eck Unveils Floating-Rate Bond ETF

April 26, 2011

Van Eck beat iShares to the punch with an investment-grade, floating-rate bond ETF.

Van Eck, the money management firm known for its natural resources funds, today launched a floating-rate bond ETF the company says is a first of its kind in that it’s designed to help investors generate yield while minimizing risk exposure through a portfolio comprised solely of investment-grade notes.

The Market Vectors Investment Grade Floating Rate ETF (NYSEArca: FLTR) beats iShares to the punch; the San Francisco-based ETF provider has a similar float-rate bond ETF in the works. Like Van Eck’s FLTR, the iShares ETF will invest in high-quality floating-rate notes rather than noninvestment-grade bank loans, as is the case with Invesco PowerShares’ Senior Loan Portfolio (NYSEArca: BKLN).

While floating-rate notes are typically attractive in an environment of rising interest rates as a short-term source of income, an investment-grade version goes even further by helping to offset some of the issuer credit risk as well as liquidity concerns often associated with below-investment-grade bank loans.

Also, because the notes have variable coupons linked to the three-month Libor (London interbank offered rate), their values are likely to fluctuate less when interest rates change than would bonds with fixed yields, lowering interest rate risk, Van Eck said in a press release.

“Currently, interest rates are very low, causing income investors to sacrifice credit quality or live with the interest rate risk of longer maturity bonds in order to find yield,” Jan Van Eck, a principal at the New York-based firm, said in the release.

“FLTR may offer an attractive alternative for conservative investors seeking investment grade quality, lower interest rate risk, and attractive income potential relative to other instruments of similar duration,” Van Eck added.

FLTR’s benchmark consists of 188 securities in five sectors, although about 95 percent of the portfolio is allocated to the financials sector.

The index, which had an average yield of 1.06 percent at the end of March, consists of investment-grade floating-rate corporate bonds with a variable coupon that have an outstanding par value of at least $500 million and have at least six months to maturity.

FLTR has a gross annual expense ratio of 0.49 percent, but a net expense ratio of 0.19 percent.

 

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