I last covered the SPDR Bloomberg Investment Grade Floating Rate ETF (NYSEARCA:FLRN) in mid-2023. In that article, I argued that FLRN’s good 5.9% yield and stable share price made the fund a buy. FLRN returned 5.9% since, outperforming most bonds and bond sub-asset classes, with the exception of high-yield bonds and senior loans. FLRN’s fundamentals remain strong, and so the fund remains a buy. Due to its stable share price, and considering likely Federal Reserve cuts, the fund might be of particular interest to more short-term or risk-averse investors, in my opinion at least.
FLRN – Basics
- Investment Manager: State Street
- Underlying Index: Bloomberg U.S. Dollar Floating Rate Note < 5 Years Index
- Expense Ratio: 0.15%
- Dividend Yield: 5.85%
- Total Returns 10Y CAGR: 2.09%
FLRN – Overview and Analysis
Stable Share Price
FLRN invests in floating rate investment-grade bonds. Floating rate bonds have negligible rate risk, investment-grade bonds have low credit risk, so the end result is a low-volatility ETF with a generally stable share price. Compare FLRN with the Vanguard Total Bond Market ETF (NASDAQ: BND):
As can be seen above, FLRN’s share price is generally quite stable, an important benefit for shareholders. Do note that the above graph coincides with a period of rising rates, and significant bond volatility.
Notwithstanding the above, the fund’s share price could fluctuate based on liquidity, credit spreads, market stress, and other issues. In most cases, these fluctuations should be quite small, as evidenced above. In a few cases, these might be quite large. FLRN suffered a double-digit drawdown during early 2020, for instance. Said drawdown was (mostly) caused by a widening discount, itself caused by extreme market stress during the pandemic.
ETFs are structured so as to minimize discounts and premiums. Large discounts are rare, and almost always temporary in nature. FLRN’s discount lasted for around a month, but most of it was gone in around a week.
As such, I would describe FLRN as being almost always a safe, stable investment, with an incredibly stable share price. ETFs rarely experience significant discounts, and I’m not expecting any for FLRN moving forward, even during future recessions or downturns. As such, I’m willing to put aside pandemic drawdowns.
Good, Above-Average 5.9% Yield
FLRN sports a 5.9% dividend yield, reasonably good on an absolute basis, and higher than that of most bonds and bond sub-asset classes. High-yield bonds and senior loans do have higher yields, but at significantly greater credit risk.
FLRN’s dividends are mostly covered by underlying generation of income, as evidenced by the fund’s 5.7% SEC yield, and 5.9% yield to maturity. There might be a small 0.1% shortfall in income, but that might simply be due to normal income / dividend volatility.
As the fund focuses on floating rate investments, its dividends have seen massive growth since the Fed started to hike. Comparing FLRN with the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEARCA: LQD), which focuses on fixed-rate investment-grade bonds, is instructive in this regard.
Spreads have widened too, in-line with the above.
On a more negative note, as the fund focuses on floating rate investments, its dividends should decrease as the Federal Reserve cuts rates later in the year. Dividend cuts should be swift, and of similar magnitude to Fed cuts.
In my opinion, as the fund offers competitive yields right now, and as the Fed should spend a couple of years cutting rates, the fund remains a solid investment opportunity for more short-term or risk-averse investors. Short-term investors might simply never experience any dividend cuts, while more risk-averse investors might be willing to forego some (future) income in exchange for the fund’s stable share price. At the same time, dovish investors might prefer to lock-in rates right now.
Some readers might have noticed that I arrived at a different conclusion in a recent article on the Franklin Senior Loan ETF (BATS:FLBL), and when discussing the iShares Interest Rate Hedged High Yield Bond ETF (NYSEARCA:HYGH). In those cases, spreads to fixed-rate securities of comparable credit risk were around 1.0% – 1.5% wider, so dividends should remain competitive for longer. Long enough for me to be more bullish too.
Performance Track-Record
FLRN’s has outperformed most bonds and bond sub-asset classes since inception, no small feat for an investment-grade ETF. Performance is as follows.
Some comments on the fund’s performance.
Returns generally track Federal Reserve / t-bill rates, with a 0.5% – 1.0% spread.
Due to the above, returns were much lower in the past, during most of the ZIRP era, but have increased as the Fed hikes rates. Higher gains have led to outperformance, considering the fund’s negligible rate risk.
Prospective long-term returns seem adequate, in the 2.5% – 4.0% range, depending on Fed policy.
FLRN has underperformed investment-grade bonds and LQD long-term, due to a higher-quality portfolio. Compare FLRN’s credit quality with that of LQD:
Overall, FLRN’s performance track-record is reasonably good, if nothing special.
FLRN versus T-Bills – Quick Comparison
FLRN is quite similar to t-bills, so thought a quick comparison was in order.
Both t-bills and FLRN’s floating rate bonds have negligible interest rate risk, leading to strong returns since early 2022.
Both t-bills and FLRN focus on investment-grade securities with little credit risk. T-bills are, off course, backed by the full faith and credit of the U.S. Federal Government, while FLRN’s bonds are almost entirely issued by comparatively safe issuers with solid credit ratings.
FLRN does have some credit risk though, which should lead to small losses during downturns and recessions. Losses reached double-digits during the pandemic, much higher than expected, due to widening discounts, a rare situation for an ETF.
Flipside of the above is that FLRN sports a slightly higher yield.
As both funds are income funds, FLRN should outperform t-bills moving forward. FLRN has significantly outperformed since inception, a bit better than expected, as the fund’s higher yield was particularly impactful during ZIRP.
Both FLRN and t-bills should see lower yields as the Fed cuts rates later in the year. Due to this, both seem particularly appropriate investments for more short-term investors.
Overall, FLRN is a slightly higher-yield, higher-risk investment when compared to t-bills. Neither investment is best, but each might be more appropriate for specific investors, depending on their risk-return profile.
Conclusion
FLRN’s good 5.9% yield and stable share price make the fund a buy. As dividends should swiftly decline as the Fed cuts rates later in the year, the fund might be of particular interest to more short-term or risk-averse investors, in my opinion at least.
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