FLTR: Investment Grade Floating Rate ETF

A niche fixed-income market is opening wider with Tuesday's (4/26/11) listing of Market Vectors Investment Grade Floating Rate ETF (FLTR).  The product developers at Van Eck's Market Vectors ETF shop have a keen sense of timing; obviously they think demand exists for something like FLTR.  Now we will see if they have another hit on their hands.

The FLTR launch comes less than two months after that of PowerShares Senior Loan Portfolio (BKLN).  Both specialize in “floating rate” debt instruments.  These are packaged bank loans with periodically resetting interest rates, usually tied to a benchmark like LIBOR.   The reset feature means that floating-rate paper has very little exposure to the negative impact of rising interest rates.  Returns are driven primarily by credit risk.

FLTR taps into the upper part of the floating-rate market by holding only debt rated at “investment grade” or higher by one of the primary rating agencies (S&P, Fitch or Moody's).  This is its primary distinction from BKLN – which despite the word “senior” in its name actually owns the floating-rate equivalent of junk bonds.  Since the 2008 financial crisis credit ratings are less trustworthy than they used to be, however, so reality may turn out to be a little different.

Nonetheless, FLTR will probably appeal to investors who want above-average yield and are concerned that inflation will drive interest rates up and Treasury bond values down.  Institutions will perceive it as less of a risk than BKLN, and the custom index that FLTR will try to replicate is designed to offer good liquidity.

FLTR comes out with a gross expense ratio of 0.49% and net expense ratio after fee waivers of 0.19%.  Average maturity of the portfolio is short at just 2.75 years.  The coupon rate for the 24 holdings is presently 0.93%, although the fund's yield is expected to be lower.  The floating rate aspect keeps the average modified duration extremely low at just 0.1 years.

For more information, visit the FLTR pageat Van Eck's web site, where you can view a fact sheet(pdf), investment case(pdf), and prospectus(pdf). 

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.