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July 29, 2022

What is a Floating Rate Income Fund?

A floating rate fund invests in financial securities like term loans, floating short-duration corporate bonds and preferred shares that pay a floating (variable) coupon. For term loans, the coupon is based on a predetermined benchmark such as the London Interbank Offered Rate (LIBOR), or the new Secured Overnight Financing Rate (SOFR). Additionally, a spread is added to the reference rate based on the issuer’s creditworthiness and current market conditions. 

 

When should you consider a floating rate fund?

 

The best time to invest in floating rate strategies is in stable and rising rate environments. Compared to conventional fixed income securities, a floating rate fund is less vulnerable to rising interest rates. Typically, loans are high-yield rated investments that have a short duration profile, providing a higher level of income that makes them less sensitive to changes in interest rates.

 

Why should you consider a floating rate fund?

 

When it comes to why you should consider investing in a floating rate income fund, there are many potential benefits, including:

  • Protection in rising interest rates environment. Due to it's coupon resetting mechanism and short duration profile, floating rate loans help protect in an inflationary and rising interest rate environment. If inflation continues to surprise markets to the upside - increasing expectations of interest rate hikes - that may lead to loans and other floating rate securities outperforming core fixed income asset classes (government bonds and investment grade bonds).
  • Lower volatility. Due to it's low duration profile, a floating rate income fund can deliver lower volatility relative to other credit asset classes like investment grade corporate bonds and high yield corporate bonds.
  • Increase portfolio diversification. Floating rate loans have a low correlation to the traditional bond market, which can act as a complement and diversifier to an existing credit portfolio.

 

Is a floating rate fund right for you?

 

If you’re thinking about adding a floating rate fund to your portfolio, consider its benefits in inflationary and rising interest rate environments. With a low correlation to traditional bonds, a floating rate fund is a simple way to add diversification and protect against easing rates.

 

CI Floating Rate Income Fund gives you the option to choose your preferred method of incorporating a floating rate strategy into your portfolio, through a mutual fund or ETF (TSX: CFRT).  It’s protection and portfolio diversification, all in one fund. Learn more about CI Floating Rate Income Fund and how it can fit in your portfolio.

IMPORTANT DISCLAIMERS

 

Commissions, management fees and expenses all may be associated with an investment in exchange-traded funds (ETFs). You will usually pay brokerage fees to your dealer if you purchase or sell units of an ETF on recognized Canadian exchanges. If the units are purchased or sold on these Canadian exchanges, investors may pay more than the current net asset value when buying units of the ETF and may receive less than the current net asset value when selling them. Please read the prospectus before investing. Important information about an exchange-traded fund is contained in its prospectus. The indicated rates of return are the historical annual compounded total returns net of fees and expenses payable by the fund (except for figures of one year or less, which are simple total returns) including changes in security value and reinvestment of all dividends/distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. ETFs are not guaranteed; their values change frequently, and past performance may not be repeated.

 

This document is provided as a general source of information and should not be considered personal, legal, accounting, tax or investment advice, or construed as an endorsement or recommendation of any entity or security discussed. Every effort has been made to ensure that the material contained in this document is accurate at the time of publication.  Market conditions may change which may impact the information contained in this document. All charts and illustrations in this document are for illustrative purposes only. They are not intended to predict or project investment results. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Investors should consult their professional advisors prior to implementing any changes to their investment strategies. 

 

Certain statements contained in this communication are based in whole or in part on information provided by third parties and CI Global Asset Management has taken reasonable steps to ensure their accuracy. Market conditions may change which may impact the information contained in this document.