Last week, the U.S. Treasury auctioned $15 billion in two-year floating rate notes in what was the first time since 1997 the Treasury unveiled a new a security to investors.
Exchange traded fund issuers are on the ball as two new floating rate ETFs will debut Tuesday. Those ETFs are the The iShares Treasury Floating Rate Bond ETF (NYSEArca: TFLO) and the WisdomTree Bloomberg Floating Rate Treasury Fund (NYSEArca: USFR).
iShares Treasury Floating Rate Bond ETF seeks to track the Barclays U.S. Treasury Floating Rate Index, a new index initially composed of the first-issued Treasury FRNs. Index holdings are expected to increase with ongoing quarterly issuance of the Treasury FRNs, according to a statement issued by BlackRock (NYSE: BLK), the world’s largest asset manager.
“iShares is thrilled to offer investors the first ETF with exposure to Treasury Floating Rate Notes. TFLO addresses two things investors are looking for today – potentially less interest rate risk in their fixed income portfolios and the relative safety of U.S. Treasuries. TFLO also expands investors’ options for short duration ETFs in today’s challenging market environment,” said Matt Tucker, head of iShares fixed income investment strategy , in the statement.
The WisdomTree Bloomberg Floating Rate Treasury Fund is expected to charge 0.15% per year. Floating rate notes are designed to pay more interest as Treasury yields rise. However, that does not mean that as short-term rates rise, floating rate notes will immediately follow.
“For example, a typical floating-rate loan might have an interest rate of two percentage points over Libor, with a Libor floor of 1%. That means that today investors get 3%, 0.76 percentage point more than they would get based on the current Libor of 0.24%. But when Libor climbs to 1%, the payout will still be the same as it is today. Libor needs to rise above 1% before investors see any improvement,” reports Andrew Blackman for the Wall Street Journal.
“We believe that floating rate Treasury securities represent an effective way for investors to help reduce their exposure to rising interest rates, while generating income payments that are backed by the full faith and credit of the U.S. government. Whereas other investments may also pay a rate of interest that resets each month or quarter, those securities are exposed to credit risk or the risk that the borrower will not be able to meet its financial obligations,” said WisdomTree Head of Fixed Income & Currency Rick Harper in a note out Monday. [An Introduction to Floating Rate Notes]
ETF Trends editorial team contributed to this post.
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