Van Eck introduces Market Vectors Investment Grade Floating Rate ETF
New York-based asset manager Van Eck Global has launched Market Vectors Investment Grade Floating Rate ETF (NYSE Arca: FLTR), an exchange-traded fund (ETF) that seeks to track, before fees and expenses, the Market Vectors Investment Grade Floating Rate Index (MVFLTR), an index consisting of a portfolio of corporate U.S. dollar-denominated investment grade floating rate notes.
FLTR represents a first-of-its-kind floating rate investment product because of its investment grade focus. Approximately USD63 Billion* is invested in floating rate mutual funds, most of which are invested in low quality, non-investment grade bank loans (aka senior loans or leveraged loans). FLTR is an innovative departure from typical floating rate funds because its underlying index tracks a portfolio of high quality, floating rate notes rather than tracking bank loans.
“Currently, interest rates are very low, causing income investors to sacrifice credit quality or live with the interest rate risk of longer maturity bonds in order to find yield,” says Jan van Eck, Principal at Van Eck Global. “FLTR may offer an attractive alternative for conservative investors seeking investment grade quality, lower interest rate risk, and attractive income potential relative to other instruments of similar duration.”
Floating rate notes, or “floaters”, have coupons that vary and are linked to three-month LIBOR (London Interbank Offered Rate), the interest rate large banks charge each other for short-term loans, or other money market reference rates plus a spread. The spread remains constant but the coupon’s benchmark rate is reset to the prevailing reference rate every three months on average. This coupon reset feature shortens duration, helping to reduce the notes’ price fluctuation as interest rates change.
Floaters are corporate debt issues and subject to credit risk. Their prices can be negatively affected if investor appetite for corporate credit risk declines. This occurred during the most recent credit crisis when investors shunned even highly rated corporate bonds, fixed and floating alike. Further, most issuance of floaters is from financial companies and a broad portfolio of floaters, such as FLTR, may be particularly susceptible to financial sector risk.
FLTR is intended to track, before fees and expenses, the performance of Market Vectors Investment Grade Floating Rate Index (MVFLTR), published by 4asset-management GmbH. The Index consists of US dollar-denominated floating rate notes issued by corporations and rated investment grade (BBB-/Baa3 or better) by at least one of three rating services: Moody’s, Standard & Poor’s, or Fitch. Index constituents must be floating rate notes with a variable coupon, have an outstanding par value of at least USD500 million and have a time to maturity of at least 6 months as of each rebalance date.
As of March 31, 2011, the Index was comprised of 188 securities across five sectors. The financial sector, however, made up the largest portion of the index with a weight of 94.9 per cent. The Index had an average yield of 1.06 per cent and a modified duration of approximately 0.10, as of the same date.
FLTR carries a gross expense ratio of 0.49 per cent and a net expense ratio of 0.19 percent. Expenses are capped contractually until September 1, 2012. Cap excludes certain expenses, such as interest.
FLTR is Van Eck’s 33rd Market Vectors ETF and is the seventh of its fixed-income ETFs spanning municipal, international and corporate bond categories— Emerging Markets Local Currency Bond ETF (EMLC), High-Yield Municipal Index ETF (HYD), Intermediate Municipal Index ETF (ITM), Long Municipal Index ETF (MLN), Pre-Refunded Municipal Index ETF (PRB) and Short Municipal Index ETF (SMB).
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