If there is one certainty with the Federal Reserve, it is that no one outside the central bank really knows exactly when the next interest rate hike is coming. Fed funds futures indicate diminishing chances of a rate hike at the Fed’s meeting later this month and, at most, bond traders are expecting just one rate hike this year.
In anticipation of a rising interest rate environment, fixed-income investors should consider exchange traded funds that track floating rate notes.
Should expectations of higher interest rates gain momentum, it would not be surprising to see investors embrace floating rate exchange traded funds as additions to fixed income portfolios.
The iShares Floating Rate Bond ETF (NYSEArca: FLOT) is one of the largest ETFs dedicated to floating rate notes. Floating rate notes, like the name suggests, have a floating interest rate. Specifically, the notes’ have a so-called reset period with interest rates tied to a benchmark, such as the Fed funds, LIBOR, prime rate or U.S. Treasury bill rate. Due to their short reset periods, these floating rate funds have relatively low rate risk.[related_stories]
FLOT “invests in fixed income securities whose interest payments adjust to reflect changes in the broader interest rate environment. The result is a portfolio whose overall duration is near zero and, therefore, protected from much of the downside risk that exists in a rising rate scenario,” according to a Seeking Alpha analysis of the ETF.