FLTR: A Fair Floating Rate ETF, But Lagging Inflation

The VanEck IG Floating Rate ETF (FLTR), which invests in investment-grade floating rate loans and offers a 4.97% SEC yield, has outperformed its closest competitors over the past nine years. However, its total return since inception has been outpaced by inflation, leading the analysis to suggest that ETFs focused on investment-grade collateralized loan obligations (CLOs) may present a better alternative for investors.

Analysis

The VanEck IG Floating Rate ETF (FLTR) presents a mixed profile for fixed-income investors. While its 30-day SEC yield of 4.97% and a history of outperforming its closest peers over the last nine years are notable positives, these are significantly overshadowed by its long-term performance against inflation. Since its inception in 2011, the fund's total return has been eroded by inflation, resulting in a negative real return for buy-and-hold investors. The fund's structure, characterized by a heavy 50% allocation to ex-US developed countries and a high concentration in the financial sector, introduces specific geographic and sector risks. The analysis suggests that the traditional floating-rate note strategy employed by FLTR may be inferior to alternatives like investment-grade collateralized loan obligation (CLO) ETFs, which are posited as a potentially more effective way to achieve positive real returns in the current environment.

Key Decisions for Investors

• Investors holding FLTR should re-evaluate their position, considering that its historical total return has not compensated for inflation, leading to a loss of purchasing power.
• Consider investigating investment-grade collateralized loan obligation (CLO) ETFs, such as CLOI or JAAA, as potential alternatives that may offer a better real return profile in the floating-rate debt space.
• When evaluating any floating-rate or high-yield fund, prioritize analysis of real returns (total return minus inflation) over nominal yield to avoid capital decay over the long term.