Fabian's Favorite Floating Rate Fund

09/13/2017 2:56 am EST

Focus: ETFS

David Fabian

Managing Partner, FMD Capital Management

Despite how negative the geopolitical and general news feeds have been, the stock market has been surprisingly resilient, says David Fabian, editor of Flexible Growth and Income Report.

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Turning to the fixed-income markets, it’s notable that investors did pile into quality assets over the last 5-10 trading sessions, pushing rates back to their June lows.

With the hurricane winding down and risk assets perking back up, it’s likely we will see a move higher in the short-term on the chart of the 10-Year Treasury Note Yield.

chart 1

An opportunity we have been analyzing is adding back a senior loan position to our portfolio to both increase income and benefit from any short to intermediate-term rise in interest rates.

As a refresher, senior loans are below investment grade floating rate notes, that adjust to a baseline index, such as LIBOR. One of the benefits of this asset class is their short duration, typically 90 days or less, making them an excellent spot to hideout during cyclical periods of rising interest rates.

You often see price increases commensurate with a rising interest rate environment as institutions and investors shorten durations but want to maintain income in their portfolios. We believe we are at an inflection point where we could see this rotation occur once again.


We are pleased to welcome back the BlackRock Floating Rate Income Strategy Fund (FRA) to our portfolio. The ETF was a tactical component of our portfolio back in the latter stages of 2016. We were able to realize excellent returns for the short time we owned it as well as collect income along the way.

chart 2

On a pure price basis, we are now repurchasing this closed-end fund at levels below our original sell point. We are recommending that all subscribers purchase a 5% position.

We are drawn back to FRA this time around for its competitive edge over other funds in the category. FRA boasts one of the most attractive expense ratios, alongside a competitive yield compared to its peers.

The fund boasts a distribution rate of 5.20% and income is paid monthly to shareholders. Currently, FRA trades at roughly a -6% discount to its underlying net asset value, which is below its 52-week historical average.

Additionally, FRA carries a 27.5% leverage ratio, and is sized at $768 million in net assets, which is important for trading liquidity.

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