BlackRock has launched an actively managed fixed income ETF in the US providing exposure to floating-rate securities.

The Federal Reserve is expected to lift rates by another 1.25 percentage points before the end of the year.

The BlackRock Floating Rate Loan ETF (BRLN US) has been listed on Cboe BZX Exchange, coming to market with $20 million in initial assets.

Floating-rate bonds offer coupons that adjust to reflect changes in interest rates. Compared to traditional bonds which pay fixed coupons, this feature makes floating-rate securities far less susceptible to losing value when interest rates increase.

Investors are increasingly taking a defensive stance on interest rates as the Federal Reserve continues to aggressively raise its benchmark rate in its bid to tame rampant inflation. Most recently, the Fed increased the federal funds rate by 0.75 percentage points for the third time in a row in September, bringing the key rate to 3.00%-3.25%.

In its latest projections, the Fed signaled plans to lift rates by another 1.25 percentage points before the end of 2022, bringing the federal funds rate to 4.25%-4.50%.

Investment approach

Actively managed by BlackRock’s Global Credit team, the ETF seeks to deliver high current income with a secondary objective of providing long-term capital appreciation.

Day-to-day operations of the fund are headed up by Mitchell S. Garfin, co-Head of US High Yield; and Carly Wilson, Managing Director and portfolio manager for bank loan and global long/short credit strategies.

The ETF invests in US dollar-denominated, floating-rate securities from issuers located worldwide, including in emerging markets.

Eligible types of securities include senior secured floating rate debt as well as second lien or other subordinated/unsecured loans (those that are paid off after senior secured debt). The fund may also invest up to 20% of its assets in fixed-rate instruments including preferred stocks and convertible securities.

The ETF is unconstrained with regard to credit quality and maturity.

As of 10 October, the fund had a weighted average coupon of 6.54% with an effective duration of just 0.44 years.

Nearly two-thirds (63.0%) of the ETF was allocated to bonds rated B with the next-largest credit buckets being BB (19.2%) and CCC (8.1%).

The ETF has an expense ratio of 0.55%. Distributions are made to investors on a monthly basis.