Charting a Course for Floating Rate Bond ETFs

Looking ahead, the floating rate notes will generate more interest if Treasury prices fall and yields rise further, which should play out if the Fed continues to taper quantitative easing and hikes interest rates.

“Another factor working in this ETF’s favor is its focus on credit quality. Floating rate notes can occasionally come from issuers with questionable credit profiles but this is entirely comprised of investment grade bonds. According to the fund’s fact sheet, the fund’s 14% allocation to BBB-rated notes is the riskiest investment this fund makes. The remaining assets are A-rated or better. Not surprisingly, over half of the fund is invested in notes issued by financial services firms. Banks would be expected to benefit from a rising rate environment since it allows them to generate more income from loans. A larger exposure to this sector should further enhance the quality of this ETF,” according to a Seeking Alpha analysis of floating rate bonds.

Market Vectors Investment Grade Floating Rate