Floating rate ETF to bet on rising rates

0

JU.S. Treasury yields are soaring this year with no signs of slowing down. 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 looking to prepare for higher rates could flock to floating rate bond ETFs. Investors currently have four floating rate bond ETFs — iShares Floating Rate Bond ETF FLOW, SPDR Bloomberg Investment Grade Floating Rate ETF FLRN, VanEck Investment Grade Floating Rate ETF FLTR and Invesco Floating Rate Investment Grade ETF VRIG – any of these could be a compelling choice.

Yields up

At the latest FOMC meeting last week, Fed Chairman Jerome Powell raised interest rates 25 basis points to 1.25%-0.50% and announced hikes in the six remaining meetings this year which will bring the interest rate to 1.9% by the end of the year. The move reflects efforts to control the highest inflation in decades. Fed Chairman Jerome Powell also showed his confidence in the US economy which is strong enough to withstand tighter monetary policy (read: 4 sector ETFs to gain from Fed rate hike).

Powell earlier this week became more hawkish and said the central bank needed to act “quickly” to tackle high inflation. This raised the possibility of 50 basis point hikes instead of six additional 25 basis point hikes this year. In the fed funds futures markets, there is a good chance that the Fed will raise interest rates by 50 basis points, or half a percent, at each of its next two meetings. According to the CME FedWatch Tool, there is a better than 70% chance that the Fed will hit 2.25% by the end of the year.

Why floating rate bonds?

Floating rate notes are investment grade and do not pay a fixed rate to investors, but have variable coupon rates which are often linked to an underlying index (such as LIBOR) plus a variable spread depending on risk credit from issuers.

The coupons of these bonds being adjusted periodically, they are less sensitive to a rise in rates compared to traditional bonds. Unlike fixed coupon bonds, these do not lose value when rates rise, making them ideal bonds to protect investors against capital erosion in a rising rate environment.

We have detailed the ETFs mentioned above here:

iShares Floating Rate Bond ETF (FLOT)

iShares Floating Rate Bond ETF tracks the BBG US Floating Rate Notes 5 Yrs and less Index and holds 427 stocks 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 higher quality notes, with 83% rated A or better.

iShares Floating Rate Bond ETF has amassed $9 billion in its asset base while trading an average daily volume of 2.2 million shares. It charges a 20 basis point annual fee (read: ETFs to buy during the last Fed rate hike and more below).

SPDR Barclays Investment Grade Floating Rate ETF (FLRN)

The SPDR Barclays Investment Grade Floating Rate ETF tracks the Bloomberg US Dollar Floating Rate Note

The SPDR Barclays Investment Grade Floating Rate ETF has assets under management of $2.9 billion and charges 15 basis points in annual fees. Volume is solid at around 885,000 shares per day on average.

Market Vectors Investment Grade Floating Rate ETF (FLTR)

The Market Vectors Investment Grade Floating Rate ETF tracks the Market Vectors Investment Grade Floating Rate Bond. Holding 214 securities, it has an average maturity of 2.93 years and an effective duration of 0.03 years.

Market Vectors Investment Grade Floating Rate ETF has accumulated $1 billion in its asset base and trades an average daily volume of 520,000 shares. The expense ratio came in at 0.14% (see: all investment grade corporate bond ETFs here).

Invesco Floating Rate Investment Grade ETF (VRIG)

Investors looking for an active approach might find VRIG an attractive choice. The Invesco Variable Rate Investment Grade ETF seeks to invest at least 80% of its net assets in a portfolio of investment grade floating rate instruments denominated in US dollars and issued in the United States. It holds 214 bonds in its basket and has amassed $563.9 million in its asset base.

Invesco Variable Rate Investment Grade ETF trades an average daily volume of 218,000 shares and charges 30 basis points in annual fees.

Want key ETF information delivered straight to your inbox?

Zacks’ free fund newsletter will update you weekly on top news and analysis, as well as the top performing ETFs.

Get it for free >>

Click to get this free report

iShares Floating Rate Bond ETF (FLOT): ETF Research Reports

VanEck Investment Grade Floating Rate ETF (FLTR): ETF Research Reports

SPDR Bloomberg Investment Grade Floating Rate ETF (FLRN): ETF Research Reports

Invesco Variable Rate Investment Grade ETF (VRIG): ETF Research Reports

To read this article on Zacks.com, click here.

Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Share.

Comments are closed.