Market Vectors Planning Investment Grade Floating Rate Bond ETF (FLTR)
Wed, Aug 25, 1:36 PM ET, by Michael Johnston
As investors have piled into the relative security of Treasury bonds, many have been extremely disappointed with the near-record low payments that these safe securities have been yielding. This has pushed many investors into other types of bonds such as corporate and municipals which have seen large inflows as investors flee the increasingly uncertain stock market for the stability of semi-annual coupon payments. In the beginning, investors had very few options when it came to investing in bonds and most offered little in the way of diversification. However, the advent of ETFs offered investors many more options in-terms of diversification and liquidity allowing investors to obtain targeted exposure to slices of the bond market at a cheap and liquid level. Although these funds were a good start, there were many holes which remained unfilled for years, forcing investors to make do with the limited choices available [see our Closer Look At Total Bond Market ETFs]. ![]( "Floating Rate <a href=") Bond ETF Is On The Horizon" src="http://etfdb.com/wp-content/uploads/2010/08/Bond-300x224.jpg" alt="" width="300" height="224" />Yet, the bond ETF space has expanded rapidly in recent months, possibly in order to capitalize on this recent shift to fixed-income securities, with a variety of muni, Treasury, and corporate bond funds launching in recent months in order to provide investors with a variety of options which target different parts of the yield curve, credit quality levels, and varying times until maturity. Despite these rapid advances, one segment of the bond world remains relatively untapped, the floating rate side of the market.
Luckily for investors this side of the market appears to finally be opening up thanks to a proposed fund from Market Vectors. According to a recent filing with the SEC, Market Vectors is planning to offer the Market Vectors Investment Grade Floating Rate Bond ETF under the symbol FLTR. The fund will track the Market Vectors Investment Grade Floating Rate Bond Index and will charge an affordable expense ratio of just 35 basis points [also see 2010: Year Of The Bond ETF]. The Fund will normally invests at least 80% of its total assets in securities that comprise the Fund's benchmark index which is comprised of U.S. dollar-denominated floating rate notes issued by corporate issuers and rated investment grade by at least one of three rating services: Moody's Investors Service, Inc., Standard & Poor's Rating Services, or Fitch, Inc. Investment grade securities are those rated Baa or higher by Moody's or rated BBB or higher by S&P or Fitch. The index consists of U.S. dollar-denominated floating rate notes and currently consist of 193 bonds. The Index is market value weighted adjusted so that the weight of all BBB issuers is the minimum of 40% or two times the number of securities with a BBB rating in the Index. Any excess weight is distributed proportionally across the other bonds and the index is rebalanced on a monthly basis. The fund will also be one of the first to offer investments in callable securities which could add to the overall risk profile of the fund by forcing the managers to reinvest the proceeds at lower rates. This issue looks to be of minimal concern to investors in the current rate environment; rates cannot go much lower so further calling of bonds seems highly unlikely [also read Convertible Bond ETFs: Best Of Both Worlds?]. Floating Rate Bonds In Focus“Rather than paying a fixed rate of interest, floating-rate securities (or floaters) offer interest payments which reset periodically, with rates tied to a representative interest rate index.” writes InvestingInBonds.com, “Floaters were first issued during a period of extreme interest rate volatility during the late 1970s” and they have remained relatively popular and in use ever since. Due to this structure, adjustable interest rates bonds fluctuate much less in response to market interest rate movements than the value of fixed rate bonds. However, there is a trade-off for investors; this reduction in interest rate sensitivity is met by a decrease in yield for investors. Yet, their yields are often comparable to short-term securities which are constantly rolled over from month-to-month and have the potential to allow investors to match asset and liability cash flows more effectively without worrying as much about interest rate changes [see High Yield Bond ETFs: Far Cry From AGG]. So, for investors who still have an itch for fixed income securities but are worried about the potential for higher rates crushing their bond prices, this new fund could make for an interesting choice should it pass through the SEC’s inspection process and launch into the ever-increasing and diversified world of ETFs. For more news on new ETFs make sure to sign up for our free ETF newsletter. Disclosure: No positions at time of writing.
SDI Glossary: "Bond" Definition
SDI Glossary: "price" Definition
SDI Glossary: "ETFs" Definition
SDI Glossary: "symbol" Definition
SDI Glossary: "Yield" Definition
This Article's Word Cloud:
Bond
ETFs
Floating
Index
Investment
Market
Rate
Vectors
about
also
bond
bonds
corporate
ever
fixed
floating
fund
grade
have
higher
index
interest
into
investors
issuers
make
many
market
months
more
much
offer
options
payments
rate
rated
rates
recent
securities
side
than
that
their
these
this
variety
were
which
will
with
More articles: 1 2 3 4 5 6 7 next »
| 
RSS