Rising interest rates have pushed fixed income investors to allocate toward shorter durations, but floating rate note exchange traded funds could be a better fit.
Floating rate ETFs have been outperforming short-duration bond ETFs as interest rates begin to rise after hitting a three decade low.
ETFs in this category include iShares Floating Rate Note Fund (NYSEArca: FLOT), SPDR Barclays Capital Investment Grade Floating Rate (NYSEArca: FLRN) and Market Vectors Investment Grade Floating Rate (NYSEArca: FLTR).
These ETFs are comprised of U.S. dollar-denominated, investment grade floating rate notes.
Floating rate notes come with a variable interest rate that adjusts to the prevailing interest rate. Consequently, the securities help shield investors against interest rate hikes – a rising interest rate corresponds with lower bond prices. However, floating rate notes come with lower yields than fixed notes of the same maturity.