Many investors worried about the prospect of rising interest rates are taking a second look at ETFs that invest in floating rate debt.
The Federal Reserve’s bond buying and investors’ desire for safety has pushed 10-year Treasury yields below 2%. However, bond investors could get hurt if interest rates finally start to rise after years of rock-bottom Treasury yields.
Floating rate notes are investment grade bonds that pay a floating rather than fixed rate coupon, which protects investors from rising interest rates. [iShares: Floating Rate Note ETF for Rising Rates]
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). [Best ETFs for Floating Rate Bonds]
Investors should keep in mind that floating rate note ETFs are currently paying little in the way of yield. For example, FLOT has a distribution yield of 0.71%, according to manager BlackRock.