Even as interest rates rise, investors are not pulling entirely out of the bond market. Instead, more shifted to short duration and floating rate bond exchange traded funds, adapting to the changing conditions.
Bond investors have been dumping long-term bonds and related funds as interest rates rose over 100 basis points from early May, writes Neena Mishra for Zacks. [Hedging Rate Risks with Bond ETFs]
Meanwhile, short-duration bonds have been gaining popularity as an alternative way to keep one’s toe in the fixed-income market. Duration is a measure of a bond’s sensitivity to changes in interest rates. Rising rates will have a greater negative impact on long-duration assets.
For instance, the iShares Short Treasury Bond ETF (NYSEArca: SHV) holds short-term Treasuries with maturities between 0 and 1 year. The fund has an effective duration of 0.43 years, a 0.15% expense ratio and a 0.04% 30-day SEC yield.
SHV is considered an ultra-safe bond investment, and some have argued that it can act as a cash alternative or money market substitute. [Floating Money Market NAV Makes Short-Duration ETFs Attractive]
Additionally, some investors have steered toward floating rate bonds that periodically adjust interest rates.
For example, the iShares Floating Rate Note ETF (NYSEArca: FLOT) provides exposure to investment grade bonds with coupon payments that change based on prevailing short-term interest rates. Consequently, the ETF has an effective duration of about 0.15 years. Sector allocations include financial institutions 56.9%, industrial 18.9%, agencies 9.0%, financial 5.8% and supranational 4.4%. FLOT comes with a 0.20% expense ratio and a 0.41% 30-day SEC yield.
The PowerShares Senior Loan Portfolio (NYSEArca: BKLN) tracks senior loans. The asset is lower on a company’s risk structure and are typically rated as speculative grade debt. Additionally, the senior loans come with a floating rate component. Investors have sought out senior loans as a way to benefit from high yields while hedging against rising rates. The fund’s average floating rate component is reset every 48.89 days. BKLN has a 0.66% expense ratio and a 3.90% 30-day SEC yield.
For more information on bonds, visit our bond ETFs category.
Max Chen contributed to this article.