Inside AdvisorShares' New Floating Rate Corporate Bond ETF

Yield-focused ETFs have gained immense popularity lately and are riding higher on investors’ drive for higher income amid a low interest rate environment prevailing globally, including the U.S. However, this situation may reverse when the Fed starts raising rates.

To provide resistance to this situation, issuers are coming up with new ETFs in bulk targeted at high yield and rate immunity. AdvisorShares is one such issuer which launched a new ETF AdvisorShares Pacific Asset Enhanced Floating Rate ETF (ARCA:FLRT) in February. Let’s dig a little deeper.

FLRT in Focus

This enhanced bond ETF looks to provide a high level of current income and presents a floating rate portfolio. Floating rate notes, via ETFs, are definitely an option for investors concerned about rising interest rates. These instruments are defensive bets against rising rates.

Floating rate bonds (also known as floaters) are bonds that pay variable coupon rates indexed to a benchmark interest rate (usually the LIBOR and Treasury rates) plus a premium depending on the credit rating of the issuer.

The fund charges 110 bps in fees. The portfolio is well spread out among individual holdings with no security holding more than 2.02% of the basket.

How Could it Fit in a Portfolio?

The fund can be a good choice for yield-hungry investors intending plays within and outside the U.S. boundaries. Thanks to rock-bottom interest rates of government-backed bonds which offer safe-haven opportunities, the U.S. corporate bond market has been on a solid path as these normally yield more than their treasury cousins. It is the same case for foreign issuers as most developed nations are presently following easy money policy.

The Fed has vowed to keep the interest rates low for as long as the economy needs it which in turn helped the high-yield bond space like corporate bonds retain its sheen. On the other hand, the strengthening of corporate America has also helped the related high yield bond market to grow. A low rate environment should also shore up the foreign corporate profitability.

Moreover, with the Fed likely to hike rates sooner or later this year, the floating rate bond ETFs space should be a wise bet. Since the coupons of these bonds are adjusted periodically, they are less sensitive to increase in rates, compared to plain vanilla traditional bonds.

ETF Competition

Corporate bond ETFs make for a crowded space headed by iShares iBoxx $ Investment Grade Corporate Bond Fund (ARCA:LQD) in terms of assets. The fund manages an asset base of about $22 billion, while charging investors just 15 basis points as fees. However, the real competitor of the newly launched product will likely be iShares Floating Rate Note Fund (NYSE:FLOT). The fund is also a popular option in the space with about $3.4 billion in assets and an expense ratio of 0.20%.

Dividend yield of FLOT stands at a meager 0.44% (as of March 3, 2015). This where FLRT should score over its toughest competitor as it combines high yield nature while prepares investors for rising rates. However, a high expense ratio might bother the fund.

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