Which ETF Is Designed to Outperform When Rates Rise?




KEMMERER: I’d like to move to another product that VanEck offers and that’s FLTR. Fran can you explain to us why this particular strategy is well suited to a rising interest rate environment.

RODILOSSO: When we talk about some of the ways to deal with higher rates in your portfolio, we talk about shortening duration. FLTR is one of the ways to move to a very short duration type fund. It is a diversified portfolio of investment grade rated floating rate notes, which are bonds effectively whose coupons reset quarterly. They are a spread over LIBOR, is how these coupons are set [The LIBOR rates, which stand for London Interbank Offered Rate, are benchmark interest rates for many adjustable rate mortgages, business loans, and financial instruments traded on global financial markets.] So as LIBOR ratchets up, as the Federal Reserve ratchets up rates, coupons on these bonds will adjust every three months, to keep up with the Fed, if you will. The duration is incredibly low FLTR. You get a little better yield than you would in Treasury-bills or government issued floaters. Because it is investment grade credit and you are still getting that credit spread. FLTR also has an interesting index construction that I think helps enhance the yield.

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LOPEZ: There is an intelligent design behind FLTR where we have evaluated the market and identified that on the longer end of the spectrum, or in terms of the maturity, you could pick up higher yields. Longer term bonds will have a higher yield. But because they’re floating rate notes and they reset on a quarterly basis it doesn’t really affect their duration or the interest rate sensitivity. You can keep low interest rate sensitivity in your portfolio and pick up a little bit higher yield potentially. You might do better than just a broad academic index. Now what that does to do, I think Fran can probably talk to this point, is it creates a little bit more exposure to credit and so you have credit duration. That is a risk to take into account. But perhaps the outlook for rising interest rates, the improving economy that might be a risk you might want to take on.

Market Realist

The VanEck Vectors Investment-Grade Floating Rate ETF (FLTR) has an effective duration of 0.14 years, as we mentioned previously. FLTR is designed to protect you from rising interest rates. While there’s very low interest rate sensitivity, rate sensitivity arises when rates rise significantly during a quarter. Coupons are adjusted quarterly.

The above graph compares FLTR’s returns with US corporate investment-grade bonds (LQD) over the last five years. As you can see, the former outperformed the latter during the last five years with much lower volatility. During the “taper tantrum” back in 2013, US corporate investment-grade bonds had an 8% downswing because rates soared. Meanwhile, FLTR was steady during the taper tantrum and even rose slightly.


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