The Federal Reserve’s easing cycle presents a pressing challenge for wealth advisors: where to deploy the massive amounts of capital sitting in short-term fixed income and cash. Sean O’Hara, President of Pacer ETF Distributors, argues the solution isn’t rushing to the long end of the curve. Instead, he advocates a measured step into floating rate exposure through vehicles such as Pacer ETFs’ Pacer Aristotle Pacific Floating Rate High Income ETF (ticker: FLRT).
The fund seeks to provide higher current income through a mix of senior secured bank loans, collateralized loan obligations (CLOs), and short-term high-yield instruments—all while seeking to avoid the interest rate sensitivity that can affect conventional bonds.
In conversation with The Wealth Advisor’s Scott Martin, O’Hara explains how the FLRT strategy works, why it may appeal in the current market environment, and how it may fit within a diversified portfolio.
The Money Market Vulnerability Few Are Discussing
Money market funds have long been a comfortable parking spot, delivering 4% to 5% returns when inflation hovered around 2.5% to 3%. Investors could hardly be blamed for enjoying decent real returns on a “riskless trade,” O’Hara acknowledges. But regulatory changes after the global financial crisis of 2007–2009 mean the safety net now works differently, and understanding the shift is crucial for anyone used to treating cash as stable.
Post-crisis reforms restricted money market funds from holding longer-duration securities in their portfolios—a capability they had before the crisis. The Federal Reserve appears poised to ease rates, signaling a potential decline for short-term returns. “Even if you just went into a Treasury bill or some other fixed income investment, you might not be as immediately affected by the Fed continuing to cut,” says O’Hara. “So, I think people need to pay attention to that.”
Money market holders, however, face direct exposure to policy shifts. “The first thing that’s going to go down in yield is going to be your money market fund, and it’s going to happen essentially the next day,” he points out.
The once-comfortable buffer has disappeared. Advisors planning around rebalancing need to recognize money market positions carry direct, immediate exposure to every Fed decision. Client conversations about cash allocations demand new urgency given the structural changes most investors don’t realize have taken place.
FLRT’s Approach: Yield Without Duration Exposure
O’Hara presents FLRT as a middle path that doesn’t require clients to move from cash into long-duration bonds—along with the interest rate risk that comes with them. The strategy blends senior secured bank loans, CLO debt securities, and a small allocation to short-term high-yield bonds to manage liquidity, seeking to deliver meaningful income while sidestepping the principal volatility many advisors aim to avoid.
O’Hara emphasizes the fund’s risk-managed design, blending yield potential with structured credit oversight. “In a fund like that, you’re getting north of a 7% yield. So, given where rates are right now, it looks attractive,” he says. But yield alone isn’t enough—credit management drives the success of floating rate strategies. “When you think about floating rate and you think about bank loans and things of that nature, obviously, the due diligence on the credit side is really important,” he emphasizes.
Sub-advised by Aristotle Pacific Capital, which has managed floating-rate credit for a decade, FLRT has experienced less than a handful of defaults during that period, O’Hara notes, with all the principal fully recovered.
“When you have a track record like Aristotle has, to us, it looks like it may be a good idea to start thinking about that,” O’Hara says. “I would say, if you had one or two defaults over the last 10 years, that’s pretty good credit management.”
How Spreads Behave When the Fed Cuts Aggressively
Floating rate securities don’t simply move in lockstep with Fed adjustments. The spread component adjusts based on credit conditions and the economic outlook, creating a more dynamic yield profile than simple rate sensitivity suggests.
O’Hara explains that during an aggressive easing cycle, banks don’t always pass rate reductions straight through to borrowers. Instead, lending spreads adjust to reflect changing conditions. “The economic backdrop has changed,” says O’Hara. “Therefore, the amount of spread that you should get on these particular loans might necessarily increase.”
Spreads can widen enough that yields remain relatively stable even as the Fed lowers rates. O’Hara frames the downside scenario practically: starting from a 7%+ yield, a quarter-point cut drops the fund to only 6.75%—with zero duration risk. Compare that to extending duration with longer-maturity bonds, where principal losses can quickly erase incremental yield.
Many assume short-term rates decline and pull long-term rates down proportionally. History suggests otherwise. “When you look at the last cutting cycle pre-election, the opposite happened,” he observes. The curve steepened unexpectedly, with long rates rising while short rates fell—eroding bond principal just as investors chased higher yields. O’Hara questions whether cash should chase duration exposure given the historical precedent, noting, “I don’t know that with this cash that you want to take that interest rate risk that goes with extending your durations.”
Instead, FLRT offers a short-duration option for investors to possibly boost yield while maintaining defensive characteristics. “Here’s a very, very short-duration play for investors where they can potentially beef up their yield and on a real return basis in fixed income land, getting a 3%+ real return. It seems like a wonderful place to be,” he says.
Starting Small: The Incremental Allocation Approach
Moving from cash straight to 10-year Treasuries represents a significant duration bet many clients won’t tolerate. FLRT provides an incremental step that aims to maintain much of cash’s low volatility while improving yield—a transition strategy rather than a wholesale portfolio overhaul.
O’Hara reinforces the value of measured allocation shifts, contending advisors don’t have to make dramatic changes all at once. “We don’t have to talk in absolutes,” he says. “You could essentially start moving 10% or 20% or 30% or 40% or 50% of that short-term cash into something like FLRT.” A phased approach can provide advisors with flexibility while potentially preserving liquidity for clients who need access to funds or prefer not to stray too far from perceived safety.
Blending cash with floating rate exposure creates a hybrid position that seeks to balance safety with enhanced income. Splitting equally between T-bills and FLRT might yield north of 5%, with half the portfolio in what O’Hara calls “absolute 100% safety” and the other half benefiting from Aristotle’s credit expertise and “long track record of managing the credit side of the business and delivering stellar results.”
This incremental approach may also ease behavioral concerns. Clients often resist sweeping changes to bond allocations, especially if they recall previous duration losses. Nobody wants to explain to a client why their “safe” bond allocation dropped 10% while they were chasing an extra percentage point of yield. A phased transition may offer psychological comfort while improving portfolio efficiency—giving advisors room to demonstrate results before committing to larger allocations.
Inside FLRT: Bank Loans, CLOs, and Tactical High Yield
Beyond bank loans, O’Hara describes the strategy’s diversified approach to floating rate investing. CLO securities provide enhanced yield relative to direct bank loan exposure, aiming to capitalize on market inefficiencies while maintaining floating rate characteristics. “In the CLO market, it’s basically just a basket of bank loans, but you can get a slightly higher yield out of a CLO than you can from a traditional bank loan today,” says O’Hara.
Senior secured bank loans—companies borrowing directly from banks on 90-day adjustable terms—provide security but longer settlement periods. CLOs offer relative value with faster settlement but less liquidity. Each component plays a specific role in the portfolio structure.
A modest allocation to short-term high-yield bonds manages daily ETF redemptions and creations, preventing forced sales of less-liquid positions. “There’s a small portion of the portfolio in high yield, short-term high-yield fixed income, so it’s a diversified floating rate fund, if you will,” O’Hara notes. “The target is to get a high yield and to minimize volatility having any duration and then relying on Aristotle’s terrific track record in terms of managing the credit exposure.”
The multipart structure is designed to address liquidity across different instruments while maintaining consistent exposure to rate adjustments—aiming to solve operational challenges without compromising the core strategy.
The Macro Backdrop Supporting Credit Strategies
As advisors approach rebalancing, O’Hara points to a supportive market backdrop: Earnings growth has accelerated from single digits a year ago to double digits, and the Fed’s easing cycle should provide accommodation rather than restriction. Capital expenditure (CapEx), particularly around AI infrastructure, is driving economic activity.
“The biggest spender today in the United States isn’t a consumer. It used to be the consumer all the time. Now it’s CapEx,” O’Hara observes. Accelerated depreciation for equipment purchases and technology buildout creates sustained investment demand, supporting corporate credit quality—the foundation underlying floating rate loans. Strong fundamentals reduce default risk in bank loan portfolios, making credit exposure more palatable when comparing risk-adjusted returns to money market alternatives.
The environment favors income-oriented strategies backed by strong corporate fundamentals. O’Hara characterizes advisor sentiment as “mildly apprehensive but bullish”—a realistic assessment that acknowledges uncertainty while recognizing positive underlying conditions. Nobody’s suggesting the path forward lacks bumps, but the macro setup supports taking measured credit risk for clients seeking income without excessive duration exposure.
In the context of sustained Federal Reserve easing, floating rate exposure may offer protection against falling money market yields while avoiding duration risk if long rates rise.
“At the end of the day, what we’re trying to do is provide content that financial advisors can use to solve problems in their clients’ accounts,” O’Hara says.
As money market returns compress with each Fed cut, the case for floating rate exposure becomes increasingly compelling. FLRT presents a solution worth serious consideration—combining yield enhancement, minimal duration risk, and a track record of credit management to address multiple portfolio challenges simultaneously. The question isn’t whether money market yields will fall. The question is where advisors will deploy capital when clients start noticing shrinking income.
_____________________
Additional Resources
______________________
Disclosures
This content is intended for financial advisors only.
Before investing you should carefully consider the Fund’s investment objectives, risks, charges, and expenses. This and other information is in the prospectus. A copy may be obtained by visiting www.paceretfs.com or calling 1-877-577-2000. Please read the prospectus carefully before investing.
An investment in the Funds is subject to investment risk, including the possible loss of principal. Pacer ETF shares may be bought and sold on an exchange through a brokerage account. Brokerage commissions and ETF expenses will reduce investment returns. There can be no assurance that an active trading market for ETF shares will be developed or maintained. The risks associated with this fund are detailed in the prospectus and could include factors such as floating rate loan risk, CLO risk, asset-backed securities risk, CMBS risk, high yield securities risk, fixed income risk, foreign securities risk, market risk, ETF risks, liquidity risk, privately issued securities risk, management risk, and sector risk.
Pacer Advisors, Inc. is the fund advisor. Aristotle Pacific Capital, LLC (formerly Pacific Asset Management LLC) serves as investment sub-advisor to the Fund.
The Fund is the successor to Pacific Global Senior Loan ETF, a series of Pacific Global ETF Trust, and its investment performance as a result of the reorganization of the Predecessor Fund into the Fund at the close of business on October 22, 2021. In addition, the Pacific Global Senior Loan ETF was the successor to the investment performance of AdvisorShares Pacific Asset Enhanced Floating Rate ETF, a series of AdvisorShares Trust, as a result of the reorganization of the series of AdvisorShares Trust into a series of Pacific Global ETF that occurred on December 27, 2019 (together, the “Predecessor Fund”). The Predecessor Fund commenced operations on February 18, 2015.
From the Predecessor Fund’s inception to October 22, 2021, the Predecessor Fund invested at least 80% of its net assets (plus any borrowings for investment purposes) in senior secured floating rate loans. After the reorganization, the Fund invests at least 80% of its net assets (plus any borrowings for investment purposes) in senior secured floating rate loans and other adjustable rate securities. Other than each Fund’s respective 80% policy and the associated risks with investing in adjustable rate securities, the Funds had similar investment objectives, strategies, and policies.
Distributor: Pacer Financial, Inc., member FINRA, SIPC, an affiliate of Pacer Advisors, Inc.
