By John Spence & Tom Lydon
ETFs that focus on floating rate notes and senior bank loans have been gathering a lot of cash lately as fixed-income investors position for rising interest rates and inflation.
For example, iShares Floating Rate Note ETF (NYSEARCA:FLOT) has more than tripled in size since the beginning of the year to $1.4 billion in assets.
On Monday alone, the BlackRock ETF had large inflows reaching nearly $500 million, according to WallachBeth Capital. The floating rate note fund ranks second on the list of best-selling ETFs the past week.
BKLN has experienced net inflows of $1.7 billion year to date, according to IndexUniverse data, taking total assets to $3.2 billion.
BKLN is designed for investors "who may be looking for floating-rate bonds to protect against rising interest rates," Morningstar analyst Timothy Strauts writes in a report on the ETF. "Most investors' portfolios are dominated by fixed-rate bonds. The biggest risk that fixed-rate securities face (aside from default) is the potential for rising interest rates. An easy way to minimize this risk is to diversify a bond portfolio by adding exposure to floating-rate securities."
BKLN has a 30-day SEC yield of 3.94%.
In another sign of the category's popularity, State Street Global Advisors and Blackstone Group have partnered on the first actively managed senior loan ETF, which launched earlier this month.
"Suppressed interest rates and central bank asset purchases have seen bank loan ETFs grow in popularity, as investors look for ways to adjust with inflation," WallachBeth said in a recent note.
FLOT and other floating rate note ETFs are different from the bank loan funds.
The key difference is that floating rate notes are typically investment grade, whereas most bank loans are rated below investment grade, explains Matt Tucker, head of fixed income strategy at iShares.
"Because of this, bank loans have the potential for higher yield, but of course this comes with greater credit and liquidity risk," Tucker said. Investors often consider floating rate notes when they want to reduce their overall exposure to interest rate risk, but favor investment grade credit risk, he added.
FLOT has a 30-day SEC yield of 0.40%.