For a real estate investor, few things are watched as closely as interest rates. Rising rates can mean higher mortgage payments, reduced cash flow, and a tougher path to acquiring new properties. This creates a significant headwind for growing a portfolio. However, an investment vehicle known as a floating rate fund offers a way to potentially benefit from the same economic forces that create this anxiety.
Table of Contents
What is a Floating Rate Fund?
A floating rate fund is a type of mutual fund or exchange-traded fund (ETF) that invests primarily in loans made to corporations. Unlike traditional bonds that pay a fixed interest rate, the interest rates on these loans are variable, or “floating.” They reset periodically—typically every 30 to 90 days—based on a prevailing benchmark interest rate.
The simplest way to understand this is to think like the bank. When you get a mortgage, you are the borrower paying interest to the lender. With a floating rate fund, the fund is the lender, and by investing in it, you become part of the entity that collects the interest payments from corporations. When benchmark interest rates rise, the rates on these loans adjust upward, leading to higher income for the fund.
Key Attributes
- Investment Type: A portfolio of variable-rate loans, often called “senior loans” or “bank loans,” made to corporations.
- Interest Rate Mechanism: Rates are not fixed. They adjust periodically in response to changes in short-term interest rates.
- Income Generation: The primary return for investors comes from the interest payments made by the corporate borrowers.
- Relationship to Fed Rates: A fund’s income potential generally moves in the same direction as benchmark rates influenced by the Federal Reserve.
Why Floating Rate Funds Matter for Real Estate Investors
Floating rate funds provide strategic benefits that directly address the core concerns of a real estate investor, helping to balance risk and diversify a portfolio.
1. Hedging Against Rate Risk
A primary benefit is the ability to hedge against the risk of rising interest rates. For a real estate investor, the same rate hike that makes a future mortgage more expensive also increases the income generated by a floating rate fund. This creates a natural balance in your financial picture.
| When Interest Rates… | Your Future Mortgage… | Your Floating Rate Fund… |
| RISE | 😟 (Gets more expensive) | 😊 (Generates more income) |
| FALL | 😊 (Gets cheaper) | 😟 (Generates less income) |
2. A Potential Home for a Down Payment
Investors often have significant capital sitting in low-yield savings accounts while searching for a property. A floating rate fund may offer a higher yield in a rising-rate environment. However, it is crucial to understand the distinction.
Important: A floating rate fund is an investment, not a savings account. It is not FDIC-insured and its principal value can fluctuate. It carries more risk than a High-Yield Savings Account (HYSA), which is designed for capital preservation.
3. Portfolio Diversification
Real estate is an illiquid asset—you cannot sell a fraction of a property quickly for cash. Floating rate funds, especially in an ETF format, are highly liquid and can be sold on any day the market is open. This provides valuable diversification beyond brick and mortar, spreading your wealth across hundreds of corporate loans. This balance complements strategies like real estate syndication and helps you build generational wealth.
How to Invest in a Floating Rate Fund
Investing in a floating rate fund is straightforward and can be done through a standard brokerage account (e.g., Fidelity, Vanguard, Schwab).
You can search for them using terms like “Floating Rate ETF” or “Senior Loan ETF.” They are often called “senior” loans because, in the event of a company’s bankruptcy, these lenders are first in line to be paid back, which adds a layer of safety relative to other creditors. Common examples in this category include tickers like BKLN or SRLN.
Common Pitfalls and Limitations
While useful, it’s important to understand the risks involved.
- Credit Risk: The primary risk is that a corporate borrower defaults on its loan, similar to a tenant failing to pay rent. Funds mitigate this by diversifying across hundreds of different loans, so the impact of a single default is limited.
- Interest Rate Risk (in Reverse): These funds perform best in a rising or high-rate environment. If the central bank begins to cut interest rates, the income generated by the fund will decline accordingly.
FAQs: Floating Rate Funds
What exactly is a “floating” rate?
In the context of Floating Rate Funds, a “floating” rate refers to the variable interest payments made by the underlying corporate loans these funds hold. Unlike fixed-rate bonds, Floating Rate Funds adjust their yields periodically based on benchmark rates such as SOFR. This means that when market interest rates rise, the income generated by Floating Rate Funds also tends to increase, helping investors keep pace with changing economic conditions.
Is this a safe place for my down payment?
No. It is not “safe” in the way an FDIC-insured savings account is. It is an investment with the potential for higher returns but also the risk of losing principal value. It should only be considered by investors who understand and are comfortable with this risk.
What is the difference between this and a regular bond fund?
Traditional bond funds hold fixed-rate bonds. When interest rates rise, the value of those existing, lower-rate bonds typically falls. Because the rates on loans in a floating rate fund reset, they have very low sensitivity to interest rate changes (low “duration”), which protects their value in a rising-rate environment.
Conclusion
For a real estate investor navigating a complex economic environment, understanding all available tools is critical. A floating rate fund should not be seen as a replacement for real estate but as a complementary financial instrument. It offers a unique way to manage interest rate risk and potentially put idle capital to work while you evaluate opportunities through metrics like cap rate analysis and cash-on-cash returns. The first step is not to invest, but to learn. Start by researching these funds to understand how they behave and decide if they fit within your broader financial strategy.
