WisdomTree is looking to add a new member to its fund family in the floating rate treasury space. While an entrance in the fixed income space comes as a shock at a time when the market is abuzz with speculation that the taper will come in March following the Fed’s Vice Chairperson (and likely future Chairperson) Janet Yellen’s dovish comments, a product exposed to floating rate treasury bonds can turn out to be a good bet (read: Time to Buy Floating Rate ETFs?).
Proposed fund in focus
The proposed passively managed ETF, via a recent SEC filing, will trade under the name of the WisdomTree Floating Rate Treasury Fund, with broad exposure to the U.S Treasury market with a focus on floating rate notes.
The proposed fund will follow the WisdomTree Floating Rate Treasury Index that measures the performance of the market for floating rate public obligations of the U.S. Treasury. The Index is market capitalization weighted and is rebalanced on a monthly basis.
How might it fit in a portfolio?
At a time like this, investments in safer securities like U.S. treasury bonds can be a good bet given the Federal Reserve’s ultra-low interest rate policy for the domestic economy (see Time for Treasury Bond ETFs?).
Although the scenario will likely remain unchanged for the near future, it will be reversed when the Fed starts to scale back its massive bond-buying program and interest rates start to creep up. Investing in bond funds would then surely result in erosion of invested capital.
In such a scenario, floating rate notes offer some cushion against interest rate volatility. This kind of bond has variable coupons indexed to a benchmark interest rate, such as LIBOR or Treasury rate, plus a fixed quoted spread.
Due to their variable-coupon nature, these bonds are much less vulnerable to increases in rates as opposed to the traditional bonds with fixed rate coupons (read: Floating Rate Bond ETF Investing 101). Hence, this ETF, if ever approved, could be an interesting option in an environment unsettled by the taper talk and the resultant increase in interest rates.
There are ample choices either in the Treasury bond space or in the floating rate corporate bond space. In Treasury bond space, options are iShares Barclays 1-3 Year Treasury Bond Fund (SHY), iShares Barclays 7-10 Year Treasury Bond ETF (IEF), iShares Barclays 3-7 Year Treasury Bond Fund (IEI) and so on.
In the floating rate category, there are a handful of options like iShares Floating Rate Note Fund (FLOT) and SPDR Barclays Capital Investment Grade Floating Rate (FLRN) with a focus on floating corporate bond funds.
However, choices are almost non-existent in the floating as well as U.S. Treasury space. In the case of U.S. treasuries, investors face much fewer credit risks as the issuer here is the U.S. Treasury. Quite expectedly, lower credit risks coupled with support against interest rate volatility will be sought by investors in a ‘QE taper’ environment.
The growing investor interest for floating treasury funds can also be felt from another filing from State Street Global Advisors. This fund from State Street will likely hit the market by January 2014 which might give the latest WisdomTree fund a fight for AUM (see QE Tapering Could Make These Bond ETFs Winners).
Given this, the proposed fund will have to sell its floating plus treasury exposure criterion in order to stay competitive in the space. While we don’t think expense ratio will be much of an issue for this unique type of fund, it would be better if the expense ratio remains low, so as to attract new investors.
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- Budget, Tax & Economy
- treasury bonds
- floating rate