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Rising rates have been the main theme this year. The Federal Reserve has already raised interest rates for the fourth consecutive time this year, taking the benchmark rate to the range of 2.25-2.5% to fight inflation. The central bank is highly anticipated to hike rates by another three-quarter points in the meeting today.
In such a scenario, investors seeking to prepare for higher rates could flock to the floating rate bond ETFs. Investors currently have four floating rate bond ETFs — iShares Floating Rate Bond ETF (FLOT - Free Report) , SPDR Bloomberg Investment Grade Floating Rate ETF (FLRN - Free Report) , VanEck IG Floating Rate ETF (FLTR - Free Report) and Invesco Variable Rate Investment Grade ETF (VRIG - Free Report) — any of which could make a compelling choice.
Yields on the Rise
Powell recently said that the Fed would need to keep interest rates high enough to slow the economy “for some time” to curb high inflation. While the tight monetary policy “for some time” will bring down inflation from its 40-year high, it means slower growth, a weaker job market and “some pain” for households and businesses.
The 10-year yields jumped to their highest level since 2011 as the latest hotter-than-expected inflation data bolstered the bets for the longer-than-expected aggressive rate hike. Inflation remains near multi-decade highs. Meanwhile, the two-year yields rose to almost a 15-year high ahead of the Fed decision (read: ETFs to Watch Ahead of Fed Meeting).
Why Floating Rate Bonds?
Floating rate bonds are investment grade and do not pay a fixed rate to investors. However, these have variable coupon rates that are often tied to an underlying index (such as LIBOR) plus a variable spread depending on the credit risk of the issuers.
Since the coupons of these bonds are adjusted periodically, these are less sensitive to an increase in rates compared to traditional bonds. Unlike fixed-coupon bonds, these do not lose value when the rates go up, making the bonds ideal for protecting investors against capital erosion in a rising rate environment.
iShares Floating Rate Bond ETF follows the Bloomberg US Floating Rate Note < 5 Years Index and holds 399 securities in its basket. It has an average maturity of 1.70 years and an effective duration of 0.08 years. iShares Floating Rate Bond ETF focuses on better quality notes with 82% of them rated A or higher.
iShares Floating Rate Bond ETF has amassed $9.3 billion in its asset base while trading in volume of 1.3 million shares per day on average. It charges 15 bps in annual fees (read: Higher Yields to Fuel Rally in These ETFs).
SPDR Barclays Investment Grade Floating Rate ETF tracks the Bloomberg U.S. Dollar Floating Rate Note < 5 Years Index with an average maturity of 1.86 years and an adjusted duration of 0.04 years. It holds 402 securities, with the top-rated bonds (A or higher) accounting for an 87% share.
SPDR Barclays Investment Grade Floating Rate ETF has AUM of $3.2 billion and charges 15 bps in annual fees. Volume is solid at around 613,000 shares a day on average.
VanEck IG Floating Rate ETF follows the MVIS US Investment Grade Floating Rate Index, which consists of U.S. dollar-denominated floating rate notes issued by corporate issuers and rated investment grade. Holding 204 securities, it has average years to maturity of 3.06 and a modified duration of 0.04 years.
VanEck IG Floating Rate ETF has accumulated $1.1 billion in its asset base and trades in an average daily volume of 346,000 shares. The expense ratio came in at 0.14% (see: all Investment Grade Corporate Bond ETFs here).
Investors seeking an active approach could find VRIG an exciting pick. Invesco Variable Rate Investment Grade ETF seeks to invest at least 80% of its net assets in a portfolio of investment-grade, variable rate instruments that are U.S. dollar-denominated and U.S.-issued. It holds 238 bonds in its basket and has amassed $611.5 million in its asset base.
Invesco Variable Rate Investment Grade ETF trades in an average daily volume of 123,000 shares and charges 31 bps in annual fees.
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Floating Rate ETFs to Manage Higher Rates
Rising rates have been the main theme this year. The Federal Reserve has already raised interest rates for the fourth consecutive time this year, taking the benchmark rate to the range of 2.25-2.5% to fight inflation. The central bank is highly anticipated to hike rates by another three-quarter points in the meeting today.
In such a scenario, investors seeking to prepare for higher rates could flock to the floating rate bond ETFs. Investors currently have four floating rate bond ETFs — iShares Floating Rate Bond ETF (FLOT - Free Report) , SPDR Bloomberg Investment Grade Floating Rate ETF (FLRN - Free Report) , VanEck IG Floating Rate ETF (FLTR - Free Report) and Invesco Variable Rate Investment Grade ETF (VRIG - Free Report) — any of which could make a compelling choice.
Yields on the Rise
Powell recently said that the Fed would need to keep interest rates high enough to slow the economy “for some time” to curb high inflation. While the tight monetary policy “for some time” will bring down inflation from its 40-year high, it means slower growth, a weaker job market and “some pain” for households and businesses.
The 10-year yields jumped to their highest level since 2011 as the latest hotter-than-expected inflation data bolstered the bets for the longer-than-expected aggressive rate hike. Inflation remains near multi-decade highs. Meanwhile, the two-year yields rose to almost a 15-year high ahead of the Fed decision (read: ETFs to Watch Ahead of Fed Meeting).
Why Floating Rate Bonds?
Floating rate bonds are investment grade and do not pay a fixed rate to investors. However, these have variable coupon rates that are often tied to an underlying index (such as LIBOR) plus a variable spread depending on the credit risk of the issuers.
Since the coupons of these bonds are adjusted periodically, these are less sensitive to an increase in rates compared to traditional bonds. Unlike fixed-coupon bonds, these do not lose value when the rates go up, making the bonds ideal for protecting investors against capital erosion in a rising rate environment.
We detailed the above-mentioned ETFs here:
iShares Floating Rate Bond ETF (FLOT - Free Report)
iShares Floating Rate Bond ETF follows the Bloomberg US Floating Rate Note < 5 Years Index and holds 399 securities in its basket. It has an average maturity of 1.70 years and an effective duration of 0.08 years. iShares Floating Rate Bond ETF focuses on better quality notes with 82% of them rated A or higher.
iShares Floating Rate Bond ETF has amassed $9.3 billion in its asset base while trading in volume of 1.3 million shares per day on average. It charges 15 bps in annual fees (read: Higher Yields to Fuel Rally in These ETFs).
SPDR Barclays Investment Grade Floating Rate ETF (FLRN - Free Report)
SPDR Barclays Investment Grade Floating Rate ETF tracks the Bloomberg U.S. Dollar Floating Rate Note < 5 Years Index with an average maturity of 1.86 years and an adjusted duration of 0.04 years. It holds 402 securities, with the top-rated bonds (A or higher) accounting for an 87% share.
SPDR Barclays Investment Grade Floating Rate ETF has AUM of $3.2 billion and charges 15 bps in annual fees. Volume is solid at around 613,000 shares a day on average.
VanEck IG Floating Rate ETF (FLTR - Free Report)
VanEck IG Floating Rate ETF follows the MVIS US Investment Grade Floating Rate Index, which consists of U.S. dollar-denominated floating rate notes issued by corporate issuers and rated investment grade. Holding 204 securities, it has average years to maturity of 3.06 and a modified duration of 0.04 years.
VanEck IG Floating Rate ETF has accumulated $1.1 billion in its asset base and trades in an average daily volume of 346,000 shares. The expense ratio came in at 0.14% (see: all Investment Grade Corporate Bond ETFs here).
Invesco Variable Rate Investment Grade ETF (VRIG - Free Report)
Investors seeking an active approach could find VRIG an exciting pick. Invesco Variable Rate Investment Grade ETF seeks to invest at least 80% of its net assets in a portfolio of investment-grade, variable rate instruments that are U.S. dollar-denominated and U.S.-issued. It holds 238 bonds in its basket and has amassed $611.5 million in its asset base.
Invesco Variable Rate Investment Grade ETF trades in an average daily volume of 123,000 shares and charges 31 bps in annual fees.