WisdomTree and State Street Global Advisors are both working floating-rate Treasury exchange traded funds as an alternative for bond investors to shield against the negative effects of rising interest rates.
Both funds will track floating rate public obligations of U.S. Treasuries, or “FRNs,” with coupon rates expected to reset weekly according to the result of the most recent 13-week T-bill auction, plus a spread, subject to a minimum net yield of zero percent.
Fixed-rate bond prices have declined as rates increased. The yield on benchmark 10-year Treasuries have increased over 100 basis points from the 1.6% low in May. Meanwhile, the Barclays U.S. Aggregate Bond Index has declined 3.5%.
While the floating rate component helps protect against rate risk, floating rate Treasuries currently have low yields. For instance, the fixed-rate two-year Treasury yields around 0.3%, and a floating rate version could offer even less, reports Jason Kephart for InvestmentNews.
“You need a base T-bill rate that’s somewhere north of zero to make it very attractive for a fund that’s also charging for their management,” Melissa Joy, director of investments at the Center for Financial Planning Inc., said in the article.
“Until interest rates rise, there’s really no point to a floating-rate Treasury fund,” Tim Strauts, an analyst at Morningstar, said in the article. “Floating-rate Treasurys make sense for the government, but for actual investors, there probably are better options.”
Investors have been attracted to the floating-rate strategy in response to rising rates. For instance, the PowerShares Senior Loan Portfolio (BKLN) , a floating-rate, high-yield, senior loan ETF, was one of the most popular ETFs this year, attracting $4.7 billion in assets year-to-date. [High-Yield Bank Loan ETFs: Credit Risk vs. Rate Risk]
Other floating rate bond ETFs include the iShares Floating Rate Bond ETF (FLOT) , SPDR Barclays Investment Grade Floating Rate (FLRN) and Market Vectors Investment Grade Floating Rate (FLTR). [BlackRock: Duration Customization]
For more information on new fund products, visit our new ETFs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.