The FLRN ETF, also known as the SPDR Bloomberg Barclays Investment Grade Floating Rate ETF, is an excellent choice for many portfolios. This ETF is run by State Street, one of the preeminent ETF providers. I have been holding a portion of my short term reserves in this ETF for some time now, and am starting an investment spotlight series to feature these ETFs. I’m not paid by the fund company or anyone else for my opinion, but the funds in my spotlight series will all be funds that I either own or would happily own.
You can read about FLRN on State Street’s website here.
What is the FLRN ETF?
The FLRN ETF invests in investment-grade floating rate notes (AKA high quality debt). What this means is that it invests in debt and that the interest rate on the debt automatically adjusts on a fixed schedule from a benchmark interest rate, like LIBOR (a popular interest rate benchmark used by banks). In other words, if interest rates on new loans are higher, the notes in the FLRN ETF portfolio will also adjust higher. Likewise, if rates fall, the interest rates on the notes will fall.
The main reason that you would want a floating rate note is to avoid large swings in price of the notes. An easy way to explain this is that if I invest in a note with a 5% return and new notes are now being issued with 10% return, my note will now be worth less money than when I purchased it. Floating rate notes largely avoid this problem by automatically adjusting the interest, thus limiting your short term upside and downside risks.
Portfolio Deep Dive
The FLRN ETF invests worldwide in floating rate notes with maturities between 1 and 5 years. Approximately 56% is invested in the United States and the rest is invested internationally. A portion is also invested in supranational organizations.
The FLRN ETF also invests fairly evenly between different levels of investment grade notes, including approximately 18% in BBB rated notes. While this is only 1 step above a “junk” bond, the shorter time duration of the notes makes it more likely that the FLRN will be paid back on all of its investments.
Why would I consider this ETF?
The risks and floating rate nature of the FLRN ETF an excellent fund for those seeking yield without a high level of risk. FLRN basically removes interest-rate risk (the risk to bond principle from changing interest rates) but is still able to yield significantly more than treasuries. In an environment in which rising interest rates are highly possible, this ETF simply fits my appetite for risk much better than some other bond ETFS. Personally, I hold some of my short term reserves in a combination of the FLRN ETF and a US Floating Rate Treasury ETF called USFR.
The biggest competitor to FLRN is an ETF called NEAR made by iShares. NEAR is also an excellent choice. Instead of investing in floating rate notes, NEAR invests in shorter term securities only with fixed rates. Both are fairly low risk and both have done similarly well over the last few years.
Coming Soon to Investment Spotlight
I plan to continue this investment spotlight series in the future to showcase other ETFs that I either own or would be happy to own. You can read about how to buy ETFs here.
If you have any ideas for ETFs I should feature here, comment below.