BlackRock (NYSE:BLK) introduced the iShares Floating Rate Note Fund (NYSEARCA:FLOT) on June 17, 2011. The new ETF seeks investment results that correspond generally to the price and yield performance of the Barclays Capital U.S. Floating Rate Note < 5 Years Index.
Floating rate notes have their interest rates adjusted periodically. This makes them less price sensitive to interest rate changes while potentially being able to capture and distribute higher yields in a rising interest rate environment. Investors wanting a better understanding of how these securities work should read BlackRock’s excellent Mechanics of the iShares Floating Rate Note Fund (FLOT) (pdf).
The underlying Barclays Capital U.S. Floating Rate Note < 5 Years Index consists of 314 constituents with an average yield to maturity of 0.74% and an effective duration of just 0.12 years.
The fund uses a sampling technique in an attempt to match the index characteristics. FLOT currently holds 60 securities with an average yield to maturity of 0.81% and an effective duration of 0.14 years. Adjusting for its 0.20% expense ratio, the fund’s initial yield estimate is 0.6% with monthly payments.
Country of issuance breakdown includes U.S. 49.0%, Australia 11.3%, U.K. 9.6%, France 7.1%, Netherlands 5.3%, Canada 2.8%, and others 15.0%. The sector breakdown is financials 65.2%, agencies 20.8%, industrial 10.4%, and others 3.6%.
FLOT becomes the third floating rate ETF on the market. Market Vectors Investment Grade Floating Rate ETF (NYSEARCA:FLTR) is a direct competitor to FLOT. It currently has a 12-month yield of 0.7%, effective duration of 0.10 years, and an expense ratio capped at 0.19%. PowerShares Senior Loan Portfolio (NYSEARCA:BKLN) holds non-investment grade (“junk”) floating rate securities with longer maturities, which makes it quite different from FLOT and FLTR. BKLN currently has a distribution yield of 3.8% and a net expense ratio of 0.83%.
Disclosure covering writer, editor and publisher: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.