Rising yields? No need to worry with variable rate ETFs, “FLTR”


Benchmark T-bill yields may be on the rise, but fixed-income investors need not worry when funds like the VanEck Vectors Premium Variable Rate ETF (FLTR) can help keep them afloat.

“Fixed income investors are in a tough spot. Treasury yields rose, resulting in losses on fixed rate bonds, ”said a Barron’s article Noted. “But Treasury prices have not yet sold enough to make these bonds attractive as a source of yield.”

“The bond market losses this year have come mostly from high duration bonds, a measure of interest rate sensitivity that is related to (but not the same as) the maturity of a bond,” adds the article.

As such, FLTR can be the perfect counterweight when it comes to increasing yields. The fund seeks to replicate as closely as possible the price and return performance of the MVIS® US Investment Grade Floating Rate Index, which is composed of floating rate bonds denominated in US dollars issued by legal persons or commercial entities. Similar companies that are investment grade rated companies in the United States.

Overall, FLTR offers investors:

  • Potential to benefit from rising interest rates: Variable rate notes have variable coupons that reset periodically.
  • Premium credit quality: The underlying index is made up of an unleveraged portfolio of investment grade variable rate corporate bonds.
  • Near-zero duration with improved return potential: Floating rate notes may offer higher returns than other short-term instruments.

FLTR can ease inflationary pressure

In addition to traditional bond exposure, the FLTR can be used as a hedge against inflationary pressures. All eyes will be on the Federal Reserve for future interest rate moves, but FLTR can help mitigate the possibility of rate hikes.

“This fund can also be useful for investors looking to fine-tune their exposure to fixed income in certain environments,” an analysis of the ETF database said. “While most bond ETFs invest exclusively in debt securities that pay a fixed coupon over the life of the note, this ETF holds debt securities that adjust their coupon payment based on a benchmark rate. . Therefore, the interest rate risk associated with this fund is minimal, as the effective duration is close to zero. This makes FLTR attractive to investors who believe interest rates will rise (rate hikes usually have a negative impact on the price of fixed rate bonds).


Comments are closed.