This ETF offers exposure to floating rate debt, an asset class that may be appealing to investors looking to minimize interest rate risk (perhaps related to concerns about rising rates). Most bond ETFs offer exposure to securities that pay a fixed coupon over the life of the note, and as such are impacted when interest rates rise or fall. FLOT invests in debt with coupon payments calculated in reference to a benchmark rate, such as LIBOR. As such, the payments made by the underlying securities will fluctuate along with prevailing market interest rates. That results in an extremely low effective duration, and almost no interest rate risk. The diminished risk of course translates into a lower expected yields as well; FLOT will generally offer less in the way of return potential than other ETFs in the Corporate Bonds ETFdb Category that invest in fixed rate debt.
There are a number of potential uses for FLOT. This fund can be used as a tactical allocation in environments where interest rates are expected to rise, shielding investors from interest rate increases. It can also be used to round out fixed income exposure in a long-term portfolio, providing exposure to credit risk while minimizing interest rate risks.
This ETF focuses on investment grade, dollar-denominated debt (though the underlying portfolio includes issuers from several different countries). Investors seeking more in the way of credit risk (and return potential) might want to take a look at BKLN. That fund also invests in floating rate debt, but focuses on obligations of lower quality issuers. FLTR is another fund offering generally similar exposure to FLOT; investors considering this asset class should compare the expenses, various yield metrics, and effective durations of these funds to find the best match for their objectives.