State Street SPDR Bloomberg Investment Grade Floating Rate ETF

FLRN

Market cap $2.65B

The State Street SPDR Bloomberg Investment Grade Floating Rate ETF offers near-zero duration risk and variable rate exposure with a small kicker from IG credit spreads. There was a further reduction in Fed Funds rate targets in the form of the latest October interest rate decision, but markets are revising upwards their expectations of cut depth. Issues like persisting CPI are a problem due to anchoring effects, and the latest cut, despite limited data from a government shutdown, addresses continued job market pressure.

Federal Reserve rates remain elevated, as do yields on cash and similar investments. FLRN invests in floating rate notes. Similar characteristics to t-bills, with a little bit more in risk, a little bit more in income. It yields 5.1%, and is a solid choice for more risk-averse investors.

The bond market looks increasingly focused on slowing economic growth vs. tariff inflation.

FLRN underperformed peers during the April 2025 sell-off and offers a yield only marginally above Fed Funds, limiting its upside. The ETF's heavy exposure to financials increases risk, especially in a recession or if spreads widen, despite its high credit quality. Alternatives like NEAR and SHY provide better risk-reward, especially as rate cuts loom and FLRN's yield premium narrows.

In recent days, a new headwind is weighing on fixed income securities: a US government budget bill, which is expected to significantly raise an already hefty federal deficit in the years ahead. Long-term Treasuries are the biggest losers post-Liberation Day, based on a set of ETFs through yesterday's close (May 21).

The thesis argues that FLRN, a floating rate ETF, is likely to underperform in a falling interest rate environment. The thesis highlights the strong historical performance of FLRN, the anticipated Fed rate cuts, and the potential negative impact of falling rates on FLRN's floating rate exposure. While some market participants are pricing a 50 bps September 2024 Fed cut, our base case predicts only 25 bps, with cuts at each Fed meeting after.

FLRN invests in floating rate investment-grade bonds, resulting in a stable share price and low volatility. The fund currently offers a 5.9% dividend yield, making it a buy for short-term or risk-averse investors. FLRN's performance track-record is reasonably good, with prospective long-term returns in the 2.5% - 4.0% range depending on Fed policy.

SPD Bloomberg Investment Grade Floating Rate ETF is a fixed-income ETF that holds floating rate investment grade bonds. The ETF offers a spread pick-up over treasuries with a 6.06% 30-day SEC yield. FLRN has exhibited a steady performance and a low duration, providing a total return of nearly 6% in 2023 with a modest -2.5% drawdown.