BlackRock launches cheapest floating rate bond ETF in Europe

Jul 12th, 2017 | By | Category: Fixed Income

BlackRock has expanded its fixed income exchange traded fund range with the launch of the iShares $ Floating Rate Bond UCITS ETF (LON: FLOT), a floating rate bond fund, designed to protect investor portfolios against a rise in interest rates.

Brett Pybus ETFs iShares

Brett Pybus, head of iShares EMEA fixed income strategy at BlackRock.

FLOT tracks the Bloomberg Barclays US Floating Rate Note < 5 Years Index which provides exposure to US dollar-denominated floating rate bonds issued globally. Floating rate bonds offer coupons that adjust to reflect changes in interest rates, compared with traditional bonds which pay fixed coupons.  To be eligible for inclusion in the index, bonds must be rated investment grade and have a maturity of five years or less.

Brett Pybus, head of iShares EMEA fixed income strategy at BlackRock, commented: “Concerns about rising rates have prompted many investors to consider moving out of longer-duration bonds, this fund provides investors with a way to reduce duration and protect portfolios against periods of rising interest rates.  The fund provides investors with exposure to short dated, high quality floating rate credit denominated in US dollars and offers an attractive yield compared with money market funds.”

FLOT currently has 86 holdings with a portfolio yield-to-maturity of 1.6%. While portfolios containing traditional (non-floating) bonds are susceptible to losing value in response to rising interest rates, floating rate bonds typically do not respond the same way. This can be seen by FLOT’s current effective duration of 0.12 years, indicating that a 1% parallel rise in interest rates would only result in a 0.12% decline in the ETF’s value, not accounting for convexity effects.

The fund is heavily weighted towards bonds from the banking sector (51.2%) which is unsurprising as issuing floating rate bonds is a common strategy for banks in order to manage the risk on their balance sheets. Supranational (10.0%), consumer cyclical (6.5%) and technology (5.5%) make up the next largest sector exposures.

The fund’s most significant credit quality exposures are to bonds rated A (37.2%), AA (28.1%) and AAA (14.1%).

“Our focus continues to be on developing a broad and granular range of ETFs that help investors build precise and cost efficient portfolios, and this fund is testament to that,” added Pybus.

The fund is physically-replicating, meaning it holds the underlying securities of the index.  It trades in US dollars and has a total expense ratio (TER) of 0.10%.

The strategy is also offered in the US within the iShares Floating Rate Bond ETF (NYSE: FLOT). This fund has just under $6 billion in assets under management but comes with a slightly higher price tag of 0.20%.

FLOT has likely been introduced in Europe with a lower TER than its US-listed equivalent so as to compete with the Lyxor $ Floating Rate Note UCITS ETF (LON: BUOY) which launched in May of this year and costs 0.15%. BUOY invests in US dollar-denominated floating-rate bonds that adjust their coupon in line with changes to the three month London Interbank Offered Rate (LIBOR). Since its launch it has accumulated $130 million in AUM.

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