Floating Rate Ideas Shine in a Higher-for-Longer World

Even as rate hikes appear to be behind us, the “all-clear” signal for long-duration fixed income hasn’t arrived. With inflation proving sticky and the front end of the curve still offering high yields, investors are remaining cautious about adding duration risk.

In this environment, floating rate instruments continue to offer a rare combination of yield, resilience, and diversification, making them a powerful strategic allocation within a broader fixed income portfolio.

Here’s why:

• Front-end yields remain elevated, offering attractive income opportunities without the need to stretch for credit or duration risk.
• Interest rate volatility is still high, reinforcing the case for rate-insulated assets.
• Duration-sensitive sectors remain vulnerable to policy shifts and shifting inflation expectations.

Floating Rate Notes: High-Quality Yield, Low Duration

Investment-grade floating rate notes (FRNs), which reset their coupons based on short-term rates like SOFR, offer a compelling value proposition in today’s market. They allow investors to earn competitive income while preserving downside protection if rates rise again.

Importantly, FRNs typically carry investment grade ratings, making them a good choice for investors who want yield without chasing lower-quality credit risk—a contrast to leveraged loans or high yield bonds. With their low correlation to rate-sensitive assets, FRNs can fulfill the twin objectives of fixed income: income and diversification.

CLOs: Income, Resilience, and Structural Strength

Investment-grade collateralized loan obligations (CLOs) offer another way to take advantage of the floating rate environment while also accessing historically attractive risk-adjusted returns.

Unlike traditional corporate debt, CLOs are structured vehicles backed by pools of senior secured loans. These structures include built-in protections like subordination tests, collateral coverage requirements, and active management. Over time, these features have helped CLOs deliver strong returns with lower historical default rates than similarly rated corporate bonds.

Notably, CLOs aren’t just a play on rising rates. Even if the Fed begins cutting, certain tranches—especially mezzanine CLOs—can still offer strong total return potential thanks to their embedded credit spreads. In a scenario where rate cuts are more aggressive than expected, spread widening may more than offset the lower base rates, providing the opportunity to continue generating high absolute yields. The benefits of lower rated CLO tranches are especially compelling when compared to unsecured high yield bonds, which lack the structural protections that have helped the CLO asset class outperform other parts of the credit spectrum during times of stress. The key is to have flexibility to take advantage of market moves, while also being able to sidestep volatility. We believe an active strategy that is not constrained to single rating provides the opportunity to allocate to the most attractive parts of the CLO market while managing risk effectively.

VanEck Floating Rate Fixed Income Solutions

At VanEck, we offer targeted ETFs designed to give investors efficient access to the benefits of floating rate fixed income exposure:

• VanEck CLO ETF (CLOI) and VanEck AA-BB CLO ETF (CLOB) offer exposure to investment grade CLOs, with CLOI investing across investment grade tranches and CLOB focusing on mezzanine tranches. Both CLOI and CLOB are actively managed by PineBridge Investments, the funds’ sub-adviser, and are managed to provide an enhanced return by identifying the most attractive segments of the CLO market, while avoiding downgrades and default losses.
• VanEck IG Floating Rate ETF (FLTR) delivers access to investment grade corporate floating rate notes. FLTR’s underlying index has a bias towards longer-maturity notes, which tend to have greater yield without an increase in interest rate risk.

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