What is FLRT? (Pros, Cons, and Strategies)

As we navigate the intricate world of investment options, it's crucial to get acquainted with a variety of financial instruments that offer unique benefits. One such option is FLRT, known for its income generation potential. In this blog post, we'll delve into what FLRT is, its advantages and disadvantages, and effective strategies for integrating it into your investment portfolio.

What is FLRT?

FLRT is an exchange-traded fund (ETF) known as the Pacer Pacific Asset Floating Rate High Income ETF.

FLRT focuses on providing income by investing primarily in floating rate loans and other floating rate debt securities. This means that unlike traditional bonds, which have a fixed interest rate, the interest rate on these loans adjusts periodically based on a reference rate.

Key Features of FLRT

• Investments in floating rate loans and debt securities
• Targets higher income generation
• Managed to adjust interest rate risk by focusing on floating rate instruments

The fund seeks to provide high current income and aims to protect against rising interest rates through the use of floating rate loans.

FLRT Composition

FLRT's portfolio is primarily composed of floating rate loans issued by corporations, which can include low to mid-grade credit quality securities. This focus means the fund aims to capture higher income while mitigating interest rate risk, a common concern in fixed-income investments. Examples of holdings might include loans from large corporations with varying credit ratings.

Pros of FLRT

Protection Against Rising Interest Rates

One of the primary appeals of FLRT is its protection against rising interest rates. Because the interest rates on its holdings adjust with market rates, the fund is less susceptible to the declines that fixed-rate debt instruments face when rates rise.

High Income Potential

FLRT aims for high current income, making it attractive for investors seeking regular income streams. The focus on floating rate loans, often with higher yields, helps achieve this goal. This makes FLRT an appealing option for income-focused investors, particularly in interest rate environments that favor floating rate securities.

Diversification

Investing in FLRT adds diversification to an income-focused portfolio, as it operates differently from traditional fixed-rate bonds and equities. This can help mitigate risks associated with any single asset class, offering a more balanced risk exposure.

Cons of FLRT

Credit Risk

The higher income potential comes with added credit risk. FLRT invests in corporate loans, which can include lower credit quality securities. This introduces the risk of default, where the issuer cannot meet its debt obligations.

Market Liquidity

Some floating rate loans may have lower market liquidity compared to other debt instruments, making them harder to buy or sell quickly. This can be a disadvantage in volatile markets, potentially impacting the fund's performance and investor's ability to promptly exit positions.

Variable Income

While FLRT's floating rate aspect protects against rising interest rates, it also means variable income. The interest rate adjustments can lead to fluctuations in the income the fund generates, which might be less predictable than traditional fixed-income investments.

FLRT Investment Strategies

FLRT offers unique advantages as a floating rate ETF, making it suitable for specific investment horizons and strategies.

Income Generation Strategy

For investors focused on income, FLRT can be part of a diversified income portfolio. By allocating a portion of your portfolio to FLRT, you can potentially enhance your current income while mitigating some interest rate risk.

Hedge Against Rising Rates

FLRT can serve as a hedge in an environment of rising interest rates. If you anticipate increases in interest rates, allocating to FLRT could balance your portfolio against the negative impacts on traditional bonds. This strategy can stabilize the income profile of an income-focused portfolio.

Diversification Approach

Incorporating FLRT within a diversified bond strategy can reduce risks associated with a single type of debt security. By including FLRT alongside fixed-rate bonds and equity investments, you attain broader market exposure and risk management.

Combining with Fixed-Rate Bonds

Investors could combine FLRT with traditional fixed-rate bonds to balance the portfolio. This combines the stability of fixed-rate bonds with the interest rate protection of floating rate loans. This approach can help in creating a resilient portfolio adaptable to varying economic cycles.

In summary, FLRT offers an attractive option for income generation and interest rate protection. However, it's essential to understand the risks involved, particularly around credit quality and income variability. Tailoring investment strategies to leverage FLRT's unique benefits while managing its risks can lead to a robust investment portfolio suited for both income and growth objectives.