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At a time like this when investors are extremely cautious about rising rate risks as well as highly volatile stock markets, investments in securities that offer significant protection against rising rates can be a good bet.
Wall Street has been on a choppy ride since the start of 2022 due to rising rate worries and geopolitics. Bond investors have already seen prices falling for their holdings and this trend may continue for some more time. iShares 20+ Year Treasury Bond ETF (TLT - Free Report) is down 32.3% this year (as of Oct 12, 2022).
The Fed has been super-hawkish in 2022. The median Federal Funds rates are now projected to be 4.4% for 2022 (from 3.4% projected in June). The same is projected to be 4.6% (from 3.8% in June) for 2023 and 3.9% (from 3.4% in June) for 2024.
Investors worried about the increase in interest rates may thus consider investing in floating rate notes via ETFs.
What Are Floating Rate Notes?
Floating rate bonds are investment grade and do not pay a fixed rate to investors but 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 issuers. Since the coupons of these bonds are adjusted periodically, they 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.
Among the nervousness of rising rates this year, the floating rate bond space has also proven to be extremely popular among investors attracting a huge inflow. While TLT is down 30%, WisdomTree Floating Rate Treasury Fund (USFR - Free Report) is up 0.3% this year (as of Oct 12, 2022). USFR has also attracted about $8 billion in assets this year.
The below-mentioned ETFs could be an excellent choice for investors wanting to play in the floating-rate bond space.
WisdomTree Bloomberg Floating Rate Treasury Fund (USFR - Free Report)
WisdomTree Floating Rate Treasury Fund seeks to track the price and yield performance, before fees and expenses, of the Bloomberg U.S. Treasury Floating Rate Bond Index. Average years to maturity is 1.43 years while the effective duration is 0.02 years. The fund charges 15 bps in fees. SEC 30-day yield (subsidized) is 3.03% annually.
iShares Treasury Floating Rate Bond ETF offers exposure to U.S. floating rate Treasury bonds, whose interest payments adjust to reflect changes in interest rates. There are a total of eight holdings in the fund. It has an effective duration of 0.01 years and average maturity of 0.58 years. The product charges 15 bps in annual fees. 30-Day SEC yield of TFLO is 2.87% (as of Oct 5, 2022).
The underlying MVIS U.S. Investment Grade Floating Rate Index consists of U.S.-dollar-denominated floating rate notes issued by corporate issuers and rated investment grade by at least one of the three rating services Moody, S&P or Fitch. The fund has 195 holdings in total. The 30-day SEC yield (as of Oct 6, 2022) is 3.53% annually. The fund charges 14 bps in fees. Years to maturity of FLTR is 3.08 years while effective duration is negative 0.12 years.
This is a new fund and is actively managed. BRLN seeks income that may adjust with changes in interest rates. The holds 7.40% of its total holdings in the form of cash. No securities account for more than 0.96% of BRLN. Net expense ratio of the product is 0.55%.
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Guide to Floating Rate Bond ETF Investing
At a time like this when investors are extremely cautious about rising rate risks as well as highly volatile stock markets, investments in securities that offer significant protection against rising rates can be a good bet.
Wall Street has been on a choppy ride since the start of 2022 due to rising rate worries and geopolitics. Bond investors have already seen prices falling for their holdings and this trend may continue for some more time. iShares 20+ Year Treasury Bond ETF (TLT - Free Report) is down 32.3% this year (as of Oct 12, 2022).
The Fed has been super-hawkish in 2022. The median Federal Funds rates are now projected to be 4.4% for 2022 (from 3.4% projected in June). The same is projected to be 4.6% (from 3.8% in June) for 2023 and 3.9% (from 3.4% in June) for 2024.
Investors worried about the increase in interest rates may thus consider investing in floating rate notes via ETFs.
What Are Floating Rate Notes?
Floating rate bonds are investment grade and do not pay a fixed rate to investors but 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 issuers. Since the coupons of these bonds are adjusted periodically, they 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.
Among the nervousness of rising rates this year, the floating rate bond space has also proven to be extremely popular among investors attracting a huge inflow. While TLT is down 30%, WisdomTree Floating Rate Treasury Fund (USFR - Free Report) is up 0.3% this year (as of Oct 12, 2022). USFR has also attracted about $8 billion in assets this year.
The below-mentioned ETFs could be an excellent choice for investors wanting to play in the floating-rate bond space.
WisdomTree Bloomberg Floating Rate Treasury Fund (USFR - Free Report)
WisdomTree Floating Rate Treasury Fund seeks to track the price and yield performance, before fees and expenses, of the Bloomberg U.S. Treasury Floating Rate Bond Index. Average years to maturity is 1.43 years while the effective duration is 0.02 years. The fund charges 15 bps in fees. SEC 30-day yield (subsidized) is 3.03% annually.
Floating Rate Bond ETF TFLO
iShares Treasury Floating Rate Bond ETF offers exposure to U.S. floating rate Treasury bonds, whose interest payments adjust to reflect changes in interest rates. There are a total of eight holdings in the fund. It has an effective duration of 0.01 years and average maturity of 0.58 years. The product charges 15 bps in annual fees. 30-Day SEC yield of TFLO is 2.87% (as of Oct 5, 2022).
VanEck IG Floating Rate ETF (FLTR - Free Report)
The underlying MVIS U.S. Investment Grade Floating Rate Index consists of U.S.-dollar-denominated floating rate notes issued by corporate issuers and rated investment grade by at least one of the three rating services Moody, S&P or Fitch. The fund has 195 holdings in total. The 30-day SEC yield (as of Oct 6, 2022) is 3.53% annually. The fund charges 14 bps in fees. Years to maturity of FLTR is 3.08 years while effective duration is negative 0.12 years.
BlackRock Floating Rate Loan ETF (BRLN - Free Report)
This is a new fund and is actively managed. BRLN seeks income that may adjust with changes in interest rates. The holds 7.40% of its total holdings in the form of cash. No securities account for more than 0.96% of BRLN. Net expense ratio of the product is 0.55%.