iShares Joins Floating-Rate ETF Party

June 17, 2011

iShares offers up its answer to the growing floating-rate note ETF trend.

iShares, the world’s largest ETF sponsor, today rolled out a new ETF that invests in floating-rate bonds to help investors weather fluctuations in interest rates. The fund joins a crowding field that already includes competing products from PowerShares and Van Eck Global.

The iShares Floating Rate Note Fund (NYSEArca: FLOT) will invest in dollar-denominated, investment-grade floating-rate bonds. Such bonds—by having adjustable interest rates—fluctuate less in value than bonds with fixed yields when interest rates are changing.

FLOT’s launch follows the rollout of both the Market Vectors Investment Grade Floating Rate ETF (NYSEArca: FLTR), which also invests in high-quality notes; and the Invesco PowerShares’ Senior Loan Portfolio (NYSEArca: BKLN), which holds noninvestment-grade bank loans.

Floating-rate bonds are often linked to borrowers that are highly leveraged, as they are issued for recapitalization needs and acquisitions, such as leveraged buyouts, iShares said in a registration statement it filed with the Securities and Exchange Commission in April. Because they’re not listed on exchanges, they’re also often less transparent.

The new iShares ETF comes with an annual expense ratio of 0.20 percent, the company said on its website. By contrast, BKLN costs 0.83 percent including acquired fund fees, while FLTR has a gross expense ratio of 0.49 percent, but a net expense ratio of 0.19 percent.

BKLN has gathered about $163 million in assets since its launch in March, while FLTR, which came to market in April, has $7.4 million, according to data compiled by IndexUniverse. Guggenheim also has a senior loan ETF in the works.

Fund Details

The new iShares ETF will include notes that have remaining maturity of anywhere from one month to five years, and have at least $300 million of outstanding face value, the iShares filing said.

The fund will track the Barclays Capital U.S. Floating Rate Note <5 Years Index, a market-capitalization-weighted benchmark that at the end of February comprised 281 issues. But it will use a representative sampling strategy, meaning it won’t own all the securities in the benchmark.

All the debt securities included in the index pay a variable coupon rate, and most of them are linked to the three-month London Interbank Offered Rate (Libor) with a fixed spread. The index is rebalanced monthly.

BlackRock Fund Advisors, the investment advisor to the fund, might also include futures and options instruments in the fund’s portfolio.


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