While the US Federal Reserve is expected to remain patient while inflation remains benign, many investors believe the central bank is likely to start raising interest rates later this year.
When the Federal Open Market Committee meets in mid-June, most investors would search for hints of an imminent rate hike in America in nearly a decade. In anticipation, many market participants have been seeking out bond funds that would remain unaffected as higher interest rates start to kick-in toward the end of this 2015.
Amid growing popularity of floating-rate products, AdvisorShares recently launched an actively managed product that seeks to provide high level of current income while preserving capital. The newly launched AdvisorShares Pacific Asset Enhanced Floating Rate Note ETF (FLRT) is managed by bond specialist Pacific Asset Management, a wholly owned unit of Pacific Life Insurance, and primarily invests in floating rate loans and below-investment grade securities, commonly referred to as junk bonds.
The new fund aims to provide a better total return compared to similar products such as the PowerShares Senior Loan Portfolio (BKLN), First Trust Senior Loan Fund (FTSL) and Highland iBoxx Senior Loan ETF (SNLN). Senior loans are a key source for variable-rate, low-cost debt for many companies as they are generally tied to the London Interbank Offered Rate (LIBOR). Borrowing rates are calculated as LIBOR plus a 3-5% margin. These loans can extend up to eight years and their rates are reset every quarter, in tandem with benchmark interest-rate changes.
While most of the existing popular products tend to focus on instruments with mid-tier credit ratings (typically BB and B rating), FLRT can select from ratings between AAA and C of domestic and foreign issuers depending upon market conditions.
To be sure, BB to B rated securities are perceived as below investment-grade debt instruments, but FLRT’s focus on senior loans rather than subordinated debts ensures the portfolio’s overall credit risk is lower than pure-play high-yield bond funds.
The fund focuses on billion-dollar, large and stable firms such as Burger King, Albertsons and Pet Smart. The fund seeks out loans that conform to Pacific Assets’ macro view on the broad economic framework to avoid loan defaults. Additionally, FLRT may borrow funds to spice-up returns with leverage going up to 130 percent of total assets under management.
The fund manager’s top-down perspective on loans and bottom-up selection process based on fundamentals are likely to lead to better returns for investors.
FLRT has a net annual expense ratio of 1.10 percent.
Disclosure: No holdings
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