In anticipation of a rising interest rate environment, fixed-income investors should consider ETFs 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.
With more expecting the Federal Reserve to begin another round of interest rate hikes as soon as December, fixed-income investors are shifting into senior secured floating-rate bank loans and related exchange traded funds to hedge against rising rate risks. That includes the popular PowerShares Senior Loan Portfolio (NYSEArca: BKLN), the largest senior loan-related ETF on the market.