Floating Rate Income Funds

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LuigiLikesPizza
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Joined: Tue Jan 05, 2016 7:54 am

Floating Rate Income Funds

Post by LuigiLikesPizza » Wed Jan 17, 2018 11:45 am

I've been looking at short term bond funds as an alternative parking spot for the money I now have in money market accounts.

Have any you used floating rate income funds? The risks are discussed in the link and are mostly predictable. I just don't seem them discussed much and was curious. At the current rate - 5%-7%, I am thinking more about risks. Digging more into this.

https://www.nuveen.com/cef/Product/Over ... ndCode=JFR

lack_ey
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Re: Floating Rate Income Funds

Post by lack_ey » Wed Jan 17, 2018 12:15 pm

Are you asking more about that specific closed-end fund (which has an expense ratio not including leverage of 1.40% and has 1.37x leverage), bank loans as a category, or investable floating-rate fixed income even more broadly?

Nuveen Floating Rate Income Fund (JFR) is a closed-end fund primarily investing in sub-investment-grade senior loans issued by banks to corporations (bank loans) and some other lower-credit fixed income. Almost all of it is junk, which probably follows from the fact that the yield is so high when the duration is below 1 year, even after you account for the leverage.

With closed-end funds you have the issue of volatile and fluctuating premium/discount to NAV and the potential for real unknowns in behavior in a crisis. The fund lost more than 50% during the financial crisis. For reference, the last 10 years:

Image
http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

There are non-leveraged, regular ETFs covering the bank loans space, though these tend to necessarily focus on the relatively more liquid parts of that market (so a little higher quality perhaps). Still, underlying liquidity is poor. You could also just look at short-term junk bonds rather than bank loans.

In addition, at lower yield and risk would be investment-grade floating rate notes. There are relatively cheap ETFs for that as well, and liquidity there is fine.

Keep in mind that credit spreads are relatively tight now, so unless you're convinced this is much more a sign of low forward risk rather than low reward for taking risk, you could readily get burned. Just don't ask me when.

ralph124cf
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Joined: Tue Apr 01, 2014 11:41 am

Re: Floating Rate Income Funds

Post by ralph124cf » Wed Jan 17, 2018 12:21 pm

LFRAX (Lord Abbot Floating Rate Notes) is also a bank loan fund that I use currently paying 4%. It is a mutual fund. It is available through Schwab for no load/no fee, but if purchased at another broker that I use it would incur an up front load of 2.25% and a 12b-1 charge as well. Check carefully.

Ralph

Valuethinker
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Re: Floating Rate Income Funds

Post by Valuethinker » Wed Jan 17, 2018 4:12 pm

lack_ey wrote:
Wed Jan 17, 2018 12:15 pm


There are non-leveraged, regular ETFs covering the bank loans space, though these tend to necessarily focus on the relatively more liquid parts of that market (so a little higher quality perhaps). Still, underlying liquidity is poor. You could also just look at short-term junk bonds rather than bank loans.

In addition, at lower yield and risk would be investment-grade floating rate notes. There are relatively cheap ETFs for that as well, and liquidity there is fine.

Keep in mind that credit spreads are relatively tight now, so unless you're convinced this is much more a sign of low forward risk rather than low reward for taking risk, you could readily get burned. Just don't ask me when.
I believe Larry Swedroe has written about these funds. He is not a fan, from memory.

Your graph says it all, really. If it hits the fan, it could hit the fan very hard. This is not a low risk investment so there is a question what role it would be playing in a bond-equity portfolio.

At least with a HY/ junk bond fund, one benefits when interest rates come down (as long as the bonds are not callable-- I think the VG fund makes an effort to avoid such issues, wherever possible).

J295
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Re: Floating Rate Income Funds

Post by J295 » Wed Jan 17, 2018 4:13 pm

Have owned Fido's floating rate fund for years. It's part of our broader non-equity allocation, which also includes CDs, total bond fund, ibonds, TIPS, savings account, short term bond fund.

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Phineas J. Whoopee
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Re: Floating Rate Income Funds

Post by Phineas J. Whoopee » Wed Jan 17, 2018 8:54 pm

If it's the floating rate part you like, rather than the leveraged and high credit risk part, the US Treasury auctions Floating Rate Notes.
PJW

LuigiLikesPizza
Posts: 291
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Re: Floating Rate Income Funds

Post by LuigiLikesPizza » Thu Jan 18, 2018 4:27 am

Thanks. Was also looking at investment grade.

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