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The U.S. Treasury yields are skyrocketing this year with no signs of slowdown. The 10-year Treasury yields jumped to 2.386% for the first time since May 2019 with many expecting a further rise.
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 Investment Grade Floating Rate ETF (FLTR - Free Report) and Invesco Variable Rate Investment Grade ETF (VRIG - Free Report) — any of which could make for a compelling choice.
Yields on Rise
In the latest FOMC meeting last week, Fed Chair Jerome Powell raised interest rates by 25 bps to 1.25%-0.50% and signaled hikes in all six remaining meetings this year that will take the interest rate to 1.9% by the year-end. The move reflects efforts to control the highest inflation in decades. Fed Chair Jerome Powell also showed confidence in the American economy that is strong enough to withstand a tighter monetary policy (read: 4 Sector ETFs to Win From Fed Rate Hike).
Powell, early this week, turned more hawkish and stated that the central bank needs to move "expeditiously" to combat high inflation. This has raised the possibility of 50-bps hikes instead of six more 25-bps hikes this year. In the fed funds future markets, odds are rising that the Fed will raise interest rates by 50 bps, or a half-percent, at each of its next two meetings. According to the CME FedWatch Tool, the probability is better than 70% that the Fed reaches 2.25% by the end of the year.
Why Floating Rate Bonds?
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 the issuers.
Since the coupons of these bonds are adjusted periodically, these are less sensitive to an increase in rates compared to the 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 BBG US Floating Rate Notes 5 Yrs and less Index and holds 427 securities in its basket. It has an average maturity of 1.71 years and an effective duration of 0.07 years. iShares Floating Rate Bond ETF focuses on better quality notes with 83% of them rated A or higher.
iShares Floating Rate Bond ETF has amassed $9 billion in its asset base while trades in volume of 2.2 million shares per day on average. It charges 20 bps in annual fees (read: ETFs to Buy on Latest Fed Rate Hike and More Hereafter).
SPDR Barclays Investment Grade Floating Rate ETF tracks the Bloomberg U.S. Dollar Floating Rate Note < 5 Years Index with an average maturity of 1.93 years and adjusted duration of 0.05 years. It holds 426 securities with the top-rated bonds (A or higher) accounting for 86% share.
SPDR Barclays Investment Grade Floating Rate ETF has AUM of $2.9 billion and charges 15 bps in annual fees. Volume is solid at around 885,000 shares a day on average.
Market Vectors Investment Grade Floating Rate ETF follows the Market Vectors Investment Grade Floating Rate Bond. Holding 214 securities, it has average years to maturity of 2.93 and effective duration of 0.03 years.
Market Vectors Investment Grade Floating Rate ETF has accumulated $1 billion in its asset base and trades in an average daily volume of 520,000 shares. 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 214 bonds in its basket and has amassed $563.9 million in its asset base.
Invesco Variable Rate Investment Grade ETF trades in an average daily volume of 218,000 shares and charges 30 bps in annual fees.
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Floating Rate ETFs to Bet on Rate Hike
The U.S. Treasury yields are skyrocketing this year with no signs of slowdown. The 10-year Treasury yields jumped to 2.386% for the first time since May 2019 with many expecting a further rise.
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 Investment Grade Floating Rate ETF (FLTR - Free Report) and Invesco Variable Rate Investment Grade ETF (VRIG - Free Report) — any of which could make for a compelling choice.
Yields on Rise
In the latest FOMC meeting last week, Fed Chair Jerome Powell raised interest rates by 25 bps to 1.25%-0.50% and signaled hikes in all six remaining meetings this year that will take the interest rate to 1.9% by the year-end. The move reflects efforts to control the highest inflation in decades. Fed Chair Jerome Powell also showed confidence in the American economy that is strong enough to withstand a tighter monetary policy (read: 4 Sector ETFs to Win From Fed Rate Hike).
Powell, early this week, turned more hawkish and stated that the central bank needs to move "expeditiously" to combat high inflation. This has raised the possibility of 50-bps hikes instead of six more 25-bps hikes this year. In the fed funds future markets, odds are rising that the Fed will raise interest rates by 50 bps, or a half-percent, at each of its next two meetings. According to the CME FedWatch Tool, the probability is better than 70% that the Fed reaches 2.25% by the end of the year.
Why Floating Rate Bonds?
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 the issuers.
Since the coupons of these bonds are adjusted periodically, these are less sensitive to an increase in rates compared to the 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 BBG US Floating Rate Notes 5 Yrs and less Index and holds 427 securities in its basket. It has an average maturity of 1.71 years and an effective duration of 0.07 years. iShares Floating Rate Bond ETF focuses on better quality notes with 83% of them rated A or higher.
iShares Floating Rate Bond ETF has amassed $9 billion in its asset base while trades in volume of 2.2 million shares per day on average. It charges 20 bps in annual fees (read: ETFs to Buy on Latest Fed Rate Hike and More Hereafter).
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 1.93 years and adjusted duration of 0.05 years. It holds 426 securities with the top-rated bonds (A or higher) accounting for 86% share.
SPDR Barclays Investment Grade Floating Rate ETF has AUM of $2.9 billion and charges 15 bps in annual fees. Volume is solid at around 885,000 shares a day on average.
Market Vectors Investment Grade Floating Rate ETF (FLTR - Free Report)
Market Vectors Investment Grade Floating Rate ETF follows the Market Vectors Investment Grade Floating Rate Bond. Holding 214 securities, it has average years to maturity of 2.93 and effective duration of 0.03 years.
Market Vectors Investment Grade Floating Rate ETF has accumulated $1 billion in its asset base and trades in an average daily volume of 520,000 shares. 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 214 bonds in its basket and has amassed $563.9 million in its asset base.
Invesco Variable Rate Investment Grade ETF trades in an average daily volume of 218,000 shares and charges 30 bps in annual fees.