Investors seeking exposure to Treasury floaters can buy them in the secondary market or directly from the Treasury. They can also buy them through the new iShares Treasury Floating Rate Bond ETF (TFLO). Some investors wonder why they would consider using an ETF to access the Treasury market instead of buying the bonds themselves. As the over $40 billion in Treasury iShares ETFs suggest, the ETF structure offers some advantages over individual bonds.
- Ease of trading: iShares ETFs can be bought and sold like a stock, a much less cumbersome process than the over the counter bond market. Securities purchased directly from the US Treasury may need to be moved into a brokerage account before you can sell them, adding another step to the process and slowing down execution.
- Professional management: an index iShares ETF seeks to track its stated benchmark, reinvesting proceeds from maturities and purchasing new securities that are issued.
- Regular income: iShares bond funds typically make monthly distributions of income, as opposed to the quarterly or semi-annual schedules for Treasury securities.
- Transparency of pricing: if you can get a stock quote, you can get a quote on the price of your ETF. This makes it much easier to track your investment.
In terms of other U.S. Treasury securities, my colleague Russ Koesterich says in his latest Investment Directions that it’s wise to avoid intermediate duration at this time – specifically five year Treasuries and TIPS. Consider sticking to very short and longer-duration fixed income investments. And if you choose to stay short, take a look at the new floating rate Treasuries.
Matt Tucker, CFA, is the iShares Head of Fixed Income Strategy and a regular contributor to The Blog. You can find more of his posts here.
Securities with floating or variable interest rates may decline in value if their coupon rates do not keep pace with comparable market interest rates. Narrowly focused investments typically exhibit higher volatility. The Fund is subject to credit risk, which refers to the possibility that the debt issuers will not be able to make principal and interest payments or may have their debt downgraded by ratings agencies. The Fund’s income may decline when interest rates fall because most of the debt instruments held by the Fund will have floating or variable rates. An investment in the Fund(s) is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.