Asset Focus: Floating Rate Funds
Floating rate funds can be a useful tool to diversify investment portfolios and boost monthly income. As a result, they have become popular with investors in recent years. Today, we take a look at this often overlooked investment.
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What Are Floating Rate Funds?
A floating rate fund is a pooled and managed investment fund – usually structured as an exchange traded fund (ETF) or mutual fund. This type of fund invests in interest-bearing assets including; corporate bonds, preferred stock, and bank loans made to corporations. This means that floating rate funds pay their shareholders a variable (floating) rate of interest because their underlying investments also pay varying rates of interest.
One of the benefits of this investment strategy is that the variable rate investments made by the fund tend to follow market interest rates in a rising rate environment. This means that if market rates rise, so too do the variable rates attached to the funds’ investments, whereas investments with a fixed rate of interest tend to lag behind the market.
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How to Invest in Floating Rate Funds
You can buy shares or units in a floating rate fund in the same way as any other mutual fund or ETF. So you can use one of the many online trading platforms that provide easy access to the whole market.
Here are 10 examples of floating rate funds with links to help you start your own research:
- ICICI Prudential Floating Interest Fund
- SPDR Bloomberg Barclays Investment Grade Floating Rate ETF
- The iShares Floating Rate Bond ETF
- Aditya Birla Sun Life Floating Rate Fund
- VanEck Vectors Investment Grade Floating Rate ETF
- Franklin India Floating Rate Fund
- Invesco Variable Rate Investment Grade ETF
- The iShares Short-Term Corporate Bond ETF
- Nippon India Floating Rate Fund
- Highland iBoxx Senior Loan ETF
What Are the Returns for A Floating Rate Fund?
The investment returns to any particular fund are of course a result of the performance of its underlying investments. As such, the funds investment strategy, fund management team, and performance of financial markets in general all play a part in fund performance for any given period.
In recent times, bank loan funds have outperformed bond funds by some considerable margin. For example, according to US News Money, the number one bank loan floating rate fund at the time of writing is the Barings Global Floating Rate Fund. this fund has delivered a trailing 1-year return of 13.89%. At the same time, ETF Database provide a list of the best floating rate bond funds. This list currently has the iShares Floating Rate Bond ETF leading the pack with a 1-year return of 0.91%.
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Risk of Investing in Floating Rate Funds?
As with any investment, floating rate funds carry risks. As these types of pooled investments hold a portfolio of underlying debt securities there are three primary risk factors to consider as follows.
The performance of any investment fund relies on the performance of the fund manager and the efficacy of their investment strategy. For example, in the current market, funds that invest in bank loans have outperformed funds that invest in bonds. Fund managers that have made the best investment selections have performed better still. Make sure to do your research on the funds management, performance and investment strategy.
As these types of funds invest in debt, there is always a risk that the borrowers might default. This is true for both bonds and bank loans. You might want to look at a funds investment portfolio to asses the amount of particularly risky debt. It is worth mentioning however that the short-term nature of floating rate funds investments makes the funds actual value less sensitive to changes in short-term borrowing rates
Interest Rate Risk
Because a these funds’ investments carry a variable rate of interest, the fund is exposed to movements in interest rates. While this makes these types of investments popular in an environment of rising interest rates, the opposite is also true.
General Market Risk
As with any publicly traded investment that invests in financial markets, a floating rate fund is exposed to the financial markets. With multiple market crashes fresh in recent memory, many investors are actively seeking to reduce their exposure to financial markets.
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Conclusion and Resources
Informed investors make better decisions. If you want to learn more about floating rate funds, you can further your research using the following resources: