ETF NEWS - ULTUMUS

IShares Floaties

Written by Bernie Thurston | 12 October 2022

BlockRock actively managed floaties ETF

BlackRock is launching an actively managed floating rate note ETF, as interest rates creep gradually higher.

 

The BlackRock Floating Rate Loan ETF (BRLN) is run by BlackRock’s global credit team. It takes an unconstrained approach, investing in floaties of any credit quality, duration, type, and issuer – so long as they’re in US dollars. It can also invest in derivatives of any kind, convertibles, or even other BlackRock ETFs and funds.

A superficial look at the portfolio holdings suggests a strong tilt towards junk-grade credits and notes.

 

The fund charges 0.55%.

 

Bernie’s commentary – nice niche, but what’s the USP?

BlackRock has clearly done its market research.

 

Floating rate ETFs are one of those remarkably successful niches that most people find too boring to study closely. There’s over $45 billion of AUM stashed inside them and yet there’s only 23 floating rate ETFs listed on US exchanges. This means the average floating rate ETF has something like $2 billion under management. Better yet: every single one of them has enough assets to be profitable. What is more, BlackRock itself is one of the primary winners here. Its FLOT ETF has almost $10 billion in AUM. While TFLO has about $3.5 billion.

 

Now is also a great time for floaties too. With interest rates rising and inflation kicking off globally, bond ETFs are getting hit hard. Floaties – with NAVs almost as stable as cash, but yields lower than most bond ETFs – have strongly outperformed.

 

There’s two obvious criticisms though. The first is: what’s the USP? Active management is not the answer. Other floating rate ETFs use it too, such as State Street’s SRLN. (And active management, as always, provides a reason to charge higher fees). It’s not the fact that it juices yields by targeting junkier floaties either – again, other ETFs do this too. So what is special about this ETF? BlackRock may have to spell it out.  

 

The second criticism is why can’t this investment strategy be done passively? We have indexes of staggering complexity these days and BlackRock has an index function internally. Is there any reason that this investment strategy cannot be done passively at a lower cost? Again, some explanation will be needed.  

 

I’m also curious as to whether it’s the best idea to get heavily invested into junk-rated credits when we’re possibly on the brink of a recession. But BlackRock’s portfolio managers will know more than me.