PGIM recreates floaty mutual fund as an ETF
PGIM has launched an actively managed floating rate loan ETF, that aims to take advantage of the rising interest rate environment.
The PGIM Floating Rate Income ETF (PFRL) gives an ETF version of the $4.6bn PGIM Floating Rate Income Fund, a mutual fund which has been consistently tapped by Morningstar as best in breed.
Floating rate loans – or floaties – offer coupons that rise with interest rates. They can be contrasted with traditional bonds, which pay fixed coupons regardless of prevailing interest rates. This makes floaties a good place to be when rates rise. Fixed coupon bonds fall in price when interest rates rise.
The fund is unconstrained, meaning it can buy floaties of any maturity and credit quality. However there are caps on certain types of assets. For instance, the fund can only have 20% in uncollateralized senior loans, and only 25% in non-US issuers.
PGIM uses both top-down and bottom-up research when picking loans.
PGIM is one of the world’s largest floating rate loan fund managers, with $38 billion in floating-rate loan assets.
The fund charges 0.72%.
Bernie’s commentary – the fee is too high
Floaties tend to come in and out of fashion, depending on where in the interest rate cycle we are. Currently, they’re in fashion, as rates and inflation shoot higher. Supporting their current trending has been their performance. Floating rate indexes have comfortably outperformed broad-market bond indexes this year.
While floaties can be a bit faddy, they’re still very popular. The largest floating rate ETF, the iShares Floating Rate Bond ETF (FLOT) has $10 billion in AUM. While the next biggest, State Street’s LFRN has $3.5 billion. A lot of this AUM has swum in this year. FLOT has raked in $2.7B year to date. FLRN is just under $1b. By contrast HYG, the iShares junk bond ETF, has lost $4.7 billion to outflows.
I guess its these juicy inflows that have attracted PGIM to launch this mutual fund as an ETF.
While the timing of the launch makes sense, I still have to question the fee. FLOT and FLRN charge tiny 0.15% fees. (Vanguard doesn’t provide a floating rate ETF for the same reason it doesn’t provide a junk bond one – the underlying loans are too illiquid, risking tracking error and pricing dislocations. So State Street and BlackRock get to sit pretty on 0.15%). PGIM is charging a fee 5x higher than its passive competitors. So the outperformance it will need to consistently generate will be quite large.