Investors concerned about rising interest rates are taking a closer look at ETFs that track corporate floating rate bonds.
Floating rate securities “have a far lower interest rate sensitivity than their fixed rate brethren, making them ideal choices in rising interest environments,” according to Zacks Investment Research.
ETFs in this category include Market Vectors Investment Grade Floating Rate Bond Fund (NYSEArca: FLTR), SPDR Barclays Capital Investment Grade Floating Rate ETF (NYSEArca: FLRN) and iShares Floating Rate Note Fund (NYSEArca: FLOT).
Market Vectors Investment Grade Floating Rate is designed for investors looking for a short-term bond alternative, said Morningstar analyst Timothy Strauts. “The fund’s short duration will help it weather a rising-interest-rate environment better than longer-duration products,” he wrote in a report on the ETF.
The asset class is “well positioned for a rising rate environment and features low correlations to many traditional equity and fixed income investments,” said Jim Ross, global head of SPDR ETFs at State Street Global Advisors.
“With short-term interest rates near zero, the potential for a rising interest rate environment is a concern for many investors in long-term Treasury bonds,” Ross added. [State Street Lists Floating-Rate Bond ETF]
Still, Zacks points out that if rates stay low, these bonds could underperform their fixed-rate counterparts, and that the ETFs have heavy concentrations in the financial sector.
Market Vectors Investment Grade Floating Rate Bond Fund