In anticipation of a rising interest rate environment, fixed-income investors should consider exchange traded funds that track floating rate notes.
Should expectations of higher interest rates gain momentum, it would not be surprising to see investors embrace floating rate exchange traded funds as additions to fixed income portfolios.
Floating rate notes, like the name suggests, have a floating interest rate. Specifically, the notes’ have a so-called reset period with interest rates tied to a benchmark, such as the Fed funds, LIBOR, prime rate or U.S. Treasury bill rate. Due to their short reset periods, these floating rate funds have relatively low rate risk.
As a result of the safe and conservative nature of floating rate bonds, investors should not expect high yields. Nevertheless, Treasury money market funds are so starved for yield that anything with an extra basis point or two and the quality and liquidity of a Treasury security will provide an attractive alternative.
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Looking ahead, the floating rate notes will generate more interest if Treasury prices fall and yields rise further, which should play out if the Fed continues on its interest rate normalization schedule.
ETF investors have a number of fund options to gain exposure to floating rate securities, including Treasury-specific, broad investment-grade corporate debt and speculative-grade senior loans.
Floating Rate Treasury ETFs:
Floating Rate Bond ETFs:
iShares Floating Rate Bond ETF (FLOT)
SPDR Barclays Investment Grade Floating Rate (FLRN)
Market Vectors Investment Grade Floating Rate (FLTR)
AdvisorShares Pacific Asset Enhanced Floating Rate Note ETF (FLRT)
Senior Bank Loan ETFs:
PowerShares Senior Loan Portfolio (BKLN)
Highland/iBoxx Senior Loan ETF (SNLN)
SPDR Blackstone/GSO Senior Loan ETF (SRLN)
First Trust Senior Loan ETF (FTSL)
For more information on floating rates, visit our floating rate notes category.