Help me understand iShares FLOT

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danielc
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Help me understand iShares FLOT

Post by danielc » Sun Nov 17, 2019 5:33 pm

Hello,

I'm looking for a place to stash an emergency fund that pays better than treasuries. One candidate is the iShares Floating Rate Bond ETF (FLOT) and I was hoping that someone here could help me understand exactly what this fund invests in. The prospectus says:
The Fund seeks to track the investment results of the Bloomberg Barclays US Floating Rate Note < 5 Years Index... which measures the performance of U.S. dollard enominated, investment-grade ... floating rate notes. Securities in the Underlying Index have a remaining maturity [ < 5 years ]... the Underlying Index was comprised of securities of companies in the following countries or regions: Australia, Austria, Belgium, Canada, China, Denmark, Finland, [ ... 23 countries] and the U.S. ... The Underlying Index consists of debt instruments that pay a variable coupon rate, a majority of which are based on the 3-month London Interbank Offer Rate (“LIBOR”), with a fixed spread. ... The Underlying Index may include U.S. registered, dollar denominated bonds of non-U.S. corporations, governments and supranational entities.
So... my first question is: What is a "floating rate note" and how is it different from a bond? Does the fact that they return variable coupon based on LIBOR mean that these debt instruments area also less volatile or otherwise safer than alternatives? The fund web page says that its effective duration is 0.14 years; that short duration for a 0-5 year instrument would make sense if the prices of the instrument just don't change a lot with changes in interest rate. So there is less term risk (in exchange, there's a risk that I might not get the interest that I hope). In a similar way, do floating rate instruments have less credit risk than fixed rate bonds?

Thanks for the help.

StrangePenguin
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Re: Help me understand iShares FLOT

Post by StrangePenguin » Sun Nov 17, 2019 5:53 pm

Interesting that it is yielding slightly better than ICSH at the moment. I have some of my emergency fund parked in that.

OnTrack
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Re: Help me understand iShares FLOT

Post by OnTrack » Sun Nov 17, 2019 6:10 pm

The 1 year price range is 50.02 - 51.01, about a 2% range. So it definitely can fluctuate in value. From the 1 year chart it looks like it dropped in value in Dec 2018 and then recovered.

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Re: Help me understand iShares FLOT

Post by fabdog » Sun Nov 17, 2019 6:20 pm

It's just what it says... these are investment grade bonds, and the coupons can change based on LIBOR... so you have the normal credit risk of corporate bonds, the changing coupons should insulate some of the interest rate changes... what goes up can also go down

So more simply... a bond with an adjustable coupon...

Mike

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Re: Help me understand iShares FLOT

Post by danielc » Sun Nov 17, 2019 6:27 pm

OnTrack wrote:
Sun Nov 17, 2019 6:10 pm
The 1 year price range is 50.02 - 51.01, about a 2% range. So it definitely can fluctuate in value. From the 1 year chart it looks like it dropped in value in Dec 2018 and then recovered.
The portfolio visualizer says that the Mas Drawdown in the 8 years that FLOT has existed is -0.52%. Any bond fund, or ladder of marketable bonds, will have some chance of dropping in price.

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Re: Help me understand iShares FLOT

Post by AlohaJoe » Sun Nov 17, 2019 6:44 pm

FLOT is over 50% bank bonds and primarily low A or high B rated.

How does one go from "I keep my emergency fund in Treasuries" to "I keep my emergency fund in borderline junk bonds from banks that caused a global financial crisis a decade ago and had to be bailed out".

Seems like a pretty big change just to chase yield.

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Re: Help me understand iShares FLOT

Post by danielc » Sun Nov 17, 2019 7:09 pm

AlohaJoe wrote:
Sun Nov 17, 2019 6:44 pm
FLOT is over 50% bank bonds and primarily low A or high B rated.

How does one go from "I keep my emergency fund in Treasuries" to "I keep my emergency fund in borderline junk bonds from banks that caused a global financial crisis a decade ago and had to be bailed out".

Seems like a pretty big change just to chase yield.
Are these "borderline junk bonds" or are they "investment grade"? I am looking for a notch or two away from treasuries. I would imagine that investment grade corporate bonds with a duration of 0.14 years would be pretty safe. No?

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Re: Help me understand iShares FLOT

Post by whodidntante » Sun Nov 17, 2019 7:18 pm

The higher yield is a straight-up reward for risk. If you accept that risk then the fund is for you. We haven't seen how this fund will do in a serious downturn, but corporates tend not to hold up as well as Treasuries.

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Re: Help me understand iShares FLOT

Post by UpperNwGuy » Sun Nov 17, 2019 7:23 pm

danielc wrote:
Sun Nov 17, 2019 5:33 pm
I'm looking for a place to stash an emergency fund that pays better than treasuries.
Why?

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Re: Help me understand iShares FLOT

Post by AlohaJoe » Sun Nov 17, 2019 7:32 pm

danielc wrote:
Sun Nov 17, 2019 7:09 pm
AlohaJoe wrote:
Sun Nov 17, 2019 6:44 pm
FLOT is over 50% bank bonds and primarily low A or high B rated.

How does one go from "I keep my emergency fund in Treasuries" to "I keep my emergency fund in borderline junk bonds from banks that caused a global financial crisis a decade ago and had to be bailed out".

Seems like a pretty big change just to chase yield.
Are these "borderline junk bonds" or are they "investment grade"?
Why do you think those can't both be true? All investment grade means is "not (yet) a junk bond".
I am looking for a notch or two away from treasuries. I would imagine that investment grade corporate bonds with a duration of 0.14 years would be pretty safe. No?
The credit rating of the bonds in the fund suggests it is about five notches away from Treasuries.

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Re: Help me understand iShares FLOT

Post by OnTrack » Sun Nov 17, 2019 7:43 pm

danielc wrote:
Sun Nov 17, 2019 6:27 pm
OnTrack wrote:
Sun Nov 17, 2019 6:10 pm
The 1 year price range is 50.02 - 51.01, about a 2% range. So it definitely can fluctuate in value. From the 1 year chart it looks like it dropped in value in Dec 2018 and then recovered.
The portfolio visualizer says that the Mas Drawdown in the 8 years that FLOT has existed is -0.52%. Any bond fund, or ladder of marketable bonds, will have some chance of dropping in price.
Year to year the max drawdown is -0.52%. Month to month it is -2.26%. I do own some FLOT but not as an emergency fund.
Perhaps MINT would be better, looks like max month to month drawdown is -0.55%. SEC yield is 2.12% vs 2.27% for FLOT.

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Re: Help me understand iShares FLOT

Post by danielc » Sun Nov 17, 2019 8:56 pm

AlohaJoe wrote:
Sun Nov 17, 2019 7:32 pm
danielc wrote:
Sun Nov 17, 2019 7:09 pm
Are these "borderline junk bonds" or are they "investment grade"?
Why do you think those can't both be true? All investment grade means is "not (yet) a junk bond".
Describing non-treasury bonds as either "junk" or "borderline junk" is not useful. I posted in this forum because I wanted help in choosing an asset. If you do not wish to help, I would be grateful if you could let me know. If you think that anything that is not a treasury is borderline junk, it would be helpful if you said so clearly. If you think that it is only the specific bonds in FLOT that are borderline junk but other kinds of non-treasury bonds are worth a look, it would be helpful if you said so clearly.

Another ETF is iShares Ultra Short-Term Bond ETF. 80% of the bonds are rated "A" or better. Is this product also "borderline junk"?
Last edited by danielc on Sun Nov 17, 2019 8:59 pm, edited 1 time in total.

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Re: Help me understand iShares FLOT

Post by danielc » Sun Nov 17, 2019 8:59 pm

OnTrack wrote:
Sun Nov 17, 2019 7:43 pm
Year to year the max drawdown is -0.52%. Month to month it is -2.26%. I do own some FLOT but not as an emergency fund.
Perhaps MINT would be better, looks like max month to month drawdown is -0.55%. SEC yield is 2.12% vs 2.27% for FLOT.
Oh! -2.26% month to month is definitely not what I'm looking for. For future reference, how did you find the month to month max drawdown?

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Re: Help me understand iShares FLOT

Post by danielc » Sun Nov 17, 2019 9:20 pm

Vanguard ranks VCSH in their lowest risk category. Maybe that's good enough for me.

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Re: Help me understand iShares FLOT

Post by bluquark » Sun Nov 17, 2019 9:29 pm

danielc wrote:
Sun Nov 17, 2019 8:56 pm
AlohaJoe wrote:
Sun Nov 17, 2019 7:32 pm
danielc wrote:
Sun Nov 17, 2019 7:09 pm
Are these "borderline junk bonds" or are they "investment grade"?
Why do you think those can't both be true? All investment grade means is "not (yet) a junk bond".
Describing non-treasury bonds as either "junk" or "borderline junk" is not useful. I posted in this forum because I wanted help in choosing an asset. If you do not wish to help, I would be grateful if you could let me know. If you think that anything that is not a treasury is borderline junk, it would be helpful if you said so clearly. If you think that it is only the specific bonds in FLOT that are borderline junk but other kinds of non-treasury bonds are worth a look, it would be helpful if you said so clearly.

Another ETF is iShares Ultra Short-Term Bond ETF. 80% of the bonds are rated "A" or better. Is this product also "borderline junk"?
Junk means BB or lower. Borderline junk means BBB. In my view A would be better called "medium-quality investment-grade". High-quality corporate bonds are AA or, rarely, AAA (mostly it's government bonds that are AAA).

I don't think FLOT and VCSH are particularly scary, but they're pure exposure to credit risk with no term risk. Personally, I don't see the use of that kind of thing in a retirement portfolio -- I'd rather load up on term risk since it's less correlated with my equities.

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Re: Help me understand iShares FLOT

Post by danielc » Sun Nov 17, 2019 9:34 pm

bluquark wrote:
Sun Nov 17, 2019 9:29 pm
Junk means BB or lower. Borderline junk means BBB. In my view A would be better called "medium-quality investment-grade". High-quality corporate bonds are AA or, rarely, AAA (mostly it's government bonds that are AAA).

I don't think FLOT and VCSH are particularly scary, but they're pure exposure to credit risk with no term risk. Personally, I don't see the use of that kind of thing in a retirement portfolio -- I'd rather load up on term risk since it's less correlated with my equities.
Thank you, that is very helpful. This isn't for a retirement portfolio; for that I'd still prefer treasuries. This is for a short-term emergency fund with 3 months of expenses.

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Re: Help me understand iShares FLOT

Post by OnTrack » Mon Nov 18, 2019 12:31 am

danielc wrote:
Sun Nov 17, 2019 8:59 pm
OnTrack wrote:
Sun Nov 17, 2019 7:43 pm
Year to year the max drawdown is -0.52%. Month to month it is -2.26%. I do own some FLOT but not as an emergency fund.
Perhaps MINT would be better, looks like max month to month drawdown is -0.55%. SEC yield is 2.12% vs 2.27% for FLOT.
Oh! -2.26% month to month is definitely not what I'm looking for. For future reference, how did you find the month to month max drawdown?
There is a "Time Period" pull down menu at the top with a choice of year-to-year or month-to-month.

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Re: Help me understand iShares FLOT

Post by danielc » Mon Nov 18, 2019 1:50 am

OnTrack wrote:
Mon Nov 18, 2019 12:31 am
danielc wrote:
Sun Nov 17, 2019 8:59 pm
OnTrack wrote:
Sun Nov 17, 2019 7:43 pm
Year to year the max drawdown is -0.52%. Month to month it is -2.26%. I do own some FLOT but not as an emergency fund.
Perhaps MINT would be better, looks like max month to month drawdown is -0.55%. SEC yield is 2.12% vs 2.27% for FLOT.
Oh! -2.26% month to month is definitely not what I'm looking for. For future reference, how did you find the month to month max drawdown?
There is a "Time Period" pull down menu at the top with a choice of year-to-year or month-to-month.
Found it. Thanks!

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Re: Help me understand iShares FLOT

Post by Dudley » Mon Nov 18, 2019 5:58 am

FLRN from SPDR is similar - corporate floating rate note - but seems better credit quality than FLOT ...

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