Floaters May Be Fantastic Alternative to T-Bills

Floating rate notes, colloquially known as floaters, are viewed as a prime fixed income destination when Treasury yields are rising. This is because these bonds are less rate-sensitive by design.

But simply because the Federal Reserve is expected to lower interest rates this year, that doesn’t mean the allure of ETFs such as the VanEck IG Floating Rate ETF (FLTR) is diminished. In fact, this may be an opportune time to consider this $2.56 billion ETF, which yields an impressive 4.28%.

FLTR turns 15 years old in April and tracks the MVIS^® US Investment Grade Floating Rate Index. It holds investment-grade corporate floaters, providing it with a yield advantage over Treasuries. That’s a compelling reason to examine the ETF over the near-term, but there’s more to the story. That includes diversification for equity-heavy portfolios as FLTR’s correlation to the S&P 500 is just 0.12, according to issuer data.

For FLTR, There’s a Wide Audience

Advisors considering FLTR can rest assured that the VanEck ETF is suitable for a wide array of client portfolios. It can aid in broadening income streams as well as seeking higher-yielding alternatives to cash instruments.

“FRNs can also function as a cash complement for investors with intermediate holding periods who are willing to accept modest volatility in exchange for higher income potential than money market instruments or Treasury bills,” according to VanEck research. “While corporate FRN prices tend to be stable due to low duration, returns are still influenced by credit spreads, meaning short-term volatility is possible during periods of market stress.”

Adding to the appeal of FLTR as an alternative for risk-averse investors is the ETF’s high credit quality. Roughly 82% of this five-star rated ETF’s holdings are graded AA or A, the second- and third-highest investment marks, respectively. Still, it pays to remember that there are times when FRNs are better bets than T-bills and others when that’s not the case.

“Use FRNs when you want to harvest higher income vs risk free rates in environments where short-term rates are elevated or expected to rise, but you want to avoid the duration losses of fixed-rate bonds. FRNs are appropriate when you accept issuer credit risk in exchange for spread-based yield,” adds VanEck.

FLTR charges 0.14% per year, or $14 on a $10,000 investment.

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