VRIG - FLRT: A High Yield High Risk Floating Rate Bond ETF

2023-10-27 12:31:01 ET

Summary

• Pacer Pacific Asset Floating Rate High Income ETF is an actively managed bond fund with a 30-day SEC yield of 8.9%.
• The FLRT ETF has changed names and strategies twice, with only data from 10/22/2021 being relevant to the current strategy.
• The fund has a high level of risk, with about 80% of asset value below investment grade, 47% in bank loans, and a higher volatility than its peers.

Strategy and portfolio

Pacer Pacific Asset Floating Rate High Income ETF ( FLRT ) is an actively managed bond exchange-traded fund listed on 2/18/2015 and paying monthly distributions. It has 151 holdings, a 30-day SEC yield of 8.9% and an expense ratio of 0.60%. Its objective is to “ provide a high level of current income by investing primarily in floating-rate loans of non-investment-grade companies. ”

FLRT is the successor of Pacific Global Senior Loan ETF since 10/22/2021, which in turn was the successor of AdvisorShares Pacific Asset Enhanced Floating Rate ETF since 12/29/2019. As the fund’s strategies and policies have changed with the reorganization, historical data prior to 10/22/2021 are irrelevant to the current strategy.

As described in the prospectus by Pacer ETFs , the fund holds

“ senior secured floating rate loans and other adjustable rate securities. Other adjustable rate securities will typically include collateralized loan obligations (“CLOs”), asset-backed securities (“ABS”), and commercial mortgage backed securities (“CMBS”) (…) The Fund may invest up to 20% of its assets in certain other types of debt instruments or securities, including corporate bonds (including floating rate investment grade bonds) and secured or unsecured second lien floating rate loans. ”

This strategy description is extremely flexible. On the downside, the decision process lacks of transparency and is impossible to back-test. In the most recent fiscal year, the portfolio turnover rate was 79%.

The portfolio has 151 holdings from 141 issuers, and U.S. securities represent 64.8% of asset value. The weighted average maturity is very close to 6 years.

The heaviest asset category is bank loans with 47.1%, followed by asset-backed securities and collateralized loan obligations (ABS/CLO) with 40.3%. Other categories are below 6%. Collateralized loan obligations are usually issued by a trust and collateralized by loans that are often rated below investment grade.

From a credit risk point of view, 19.9% of assets have an investment grade rating (BBB or better). The portfolio is tilted to the safer range of the “junk bond” category: 78.5% is rated BB or B.

Several bonds from the same issuer may be listed in the portfolio. I have calculated and listed in the next table the top 10 issuers (including cash and derivatives). None of them weighs more than 4%, so risks related to individual companies are moderate.

Competitors

The next table compares characteristics of FLRT and four of the largest floating rate bond ETFs.

FLRT has not been as good as its peers at preserving asset value since the fund started the current strategy (the next chart plots price return from 10/22/2021).

However, it has outperformed in the last 12 months (next chart). FLRT is more volatile than its peers, which are heavier in investment grade bonds.

Takeaw ay

Pacer Pacific Asset Floating Rate High Income ETF ((FLRT)) is an actively managed bond fund with an 8%+ yield. It was launched in 2015, but changed names and strategies twice. Only data from 10/22/2021 are relevant to the current strategy. About 80% of asset value is rated below investment grade and 47% is in bank loans.

The fund’s profile is quite risky and consistent with such a high yield. This is confirmed by the 2-year history of the current strategy: FLRT has been more volatile than the most popular floating rate bond ETFs, which are tilted to investment grade securities and feature yields in a 5-6% range.

For further details see: