FLOT iShares Floating Rate Bond ETF
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Floating-rate bond funds provide investors with exposure to bonds that adjust interest payments to reflect fluctuations in interest rates. Floating rate bond ETFs allow investors to manage interest rate risk and place a tactical bet on potential rises in interest rates. Investors and traders seeking to gain exposure to investment-grade floating rate bonds may look to the iShares Floating Rate Bond ETF (NYSEARCA: FLOT), which is a liquid option to place a tactical trade on potential increases in interest rates.
What It Tracks
FLOT offers exposure to short-term, investment-grade, floating rate U.S. bonds with over 400 holdings. The iShares Floating Rate Bond ETF tracks the investment results of the Barclays U.S. Floating Rate Note 5 Years Index, FLOT's underlying, or benchmark, index. This index measures the performance of floating rate, investment-grade U.S. dollar-denominated bonds that have remaining maturities between one month and five years and $300 million or more of outstanding face value. The benchmark index includes various bonds issued by small-, mid- and large-cap companies that pay a floating coupon rate primarily based on the three-month London Interbank Offer Rate, or LIBOR, with a fixed spread.
FLOT and its benchmark index include bonds that are rated BBB or higher by Standard &; Poor's Rating Services. FLOT is overweight in the banking sector and allocates 54.72% of its portfolio to floating-rate bonds issued by companies and agencies in the sector. The majority of FLOT's holdings have maturities between one month and three years, which minimize its effective duration.
How It Tracks It
To provide investment results corresponding to the Barclays U.S. Floating Rate Note 5 Years Index, FLOT implements a passive, representative sampling strategy. This approach helps to reduce the chance of FLOT outperforming or underperforming its underlying index and mitigates risks inherent to active strategies. FLOT invests in a representative sample of bonds that collectively has similar characteristics to the benchmark index. The fund generally invests at least 90% of its total net assets in the component securities comprising the benchmark index and may invest no more than 10% of its total net assets in certain derivative contracts, cash and cash equivalents.
FLOT's strategy and liquidity help to minimize its tracking error to only 0.04%. This tracking error indicates FLOT is highly correlated to its benchmark index and is effectively replicating its benchmark index. Its tracking error mainly stems from the expense ratio it charges to investors.
Management
FLOT was issued on June 14, 2011 by BlackRock iShares, one of the largest ETF providers in the world. As of Dec. 31, 2014, BlackRock iShares had $1.03 trillion in assets under management and offered 717 ETFs. FLOT is a part of iShares U.S. Bonds - Short Duration series, which offers various ETFs that track bonds with remaining maturities between zero and five years.
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