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Floating Rate Bond ETF Takes Advantage of Short-Term Maturities

This article was originally published on ETFTrends.com.

When it comes to fixed income investing, investors may seek long-term bonds to extract its benefits of higher returns in lieu of additional risk, but in market times like today where trade concerns continue to roil the markets and interest rate spikes lie ahead, a short-term strategy in conjunction with a floating rate component could be the ticket to solid returns as in the case of the iShares Floating Rate Bond ETF (FLOT) .

Ideally, short-term bonds will have the attached benefit of less volatility when compared to its longer-termed bond counterparts. However, in relation to human nature seeking instant gratification rather than waiting for the long-term benefit, the case for FLOT is made.

FLOT seeks to track the investment results of the Bloomberg Barclays US Floating Rate Note < 5 Years Index , which measures the performance of U.S. dollar-denominated, investment-grade floating rate notes--this is where 90 percent of its assets are derived. The underlying index itself is up 2.2 percent within the past year.

Floating Rate Bond ETF Takes Advantage of Short-Term Maturities 2

Likewise, FLOT has been the beneficiary of the index's serendipitous run up the past year with its 1.99 percent return. Year-to-date, FLOT is up 1.06 percent and 1.39 percent within the last three years.

Floating Rate Bond ETF Takes Advantage of Short-Term Maturities 1

In addition, FLOT concentrates its loan portfolio within the banking industry with A-Rated or better credit ratings. This is beneficial in the shorter-termed duration fixed income space in terms of hedging default risk by the underlying loans represented in the portfolio.

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With its floating rate component, FLOT will shield the investor against interest rate hikes, particularly if further economic data portends to more hawkish signs of economic growth.

FLOT benefits review:

  • Exposure to U.S. floating rate bonds, whose interest payments adjust to reflect changes in interest rates
  • Access to 300+ shorter-term investment-grade bonds in a single fund
  • Use to put cash to work and manage interest rate risk

For more trends in fixed income, visit the Fixed Income Channel.