Floating Rate ETF Analysis


Although the consensus of high inflation is transitory in 2021, the five-year inflation expectation rate in the United States remains stubbornly above 2%. Investors hoping to avoid repositioning their portfolios in the face of higher inflation are being forced to reconsider their asset allocation frameworks. High inflation tends to cause interest rates to rise.

Last year we analyzed Inflation-Themed ETFs and concluded that these were quite diverse in portfolio construction, but the correlation with inflation was relatively low. Then we analyzed ETFs that are marketed as instruments for a rising interest rate environment, where portfolios were equally heterogeneous. Only ETFs exposed to financial services companies and short bond positions offered a positive correlation with interest rates.

Investors concerned about high inflation or rising interest rates may also consider ETFs holding floating rate securities, which we analyze in this research note.

ETF Universe

We focus on floating rate ETFs traded in the US, a universe of 18 instruments. The first fund was launched in 2017 and the increase in ETFs has been steady over time with one or two additional products hitting the market each year.

Floating rate instruments typically pay a base rate like LIBOR or SOFR plus a spread, so investors expect there to be minimal interest rate risk. These ETFs can be classified into four types:

  • Investment Grade Floating Rate ETFs
  • Secured Loan Obligation (CLO) ETFs
  • Senior Loan ETFs
  • Preferred Floating Rate ETFs

Fees and returns

Categorization can be by product name or yield given significant differences. Premium Floating Rate ETFs have negative to barely positive returns, CLO ETF returns are around 1%, Senior Loan ETFs are paying over 3% and Variable Preferred ETFs are offering returns over 5%. %.

Management fees charged by ETFs are based on their return, risk profile and launch date. Since the ETF market is relatively saturated, new products tend to charge less and compete on price.


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