Floating rate bonds and the related exchange traded funds could hold increased appeal for fixed income investors against the backdrop of rising interest rates.
The Federal Reserve has boosted borrowing costs twice this year and many bond market observers expect a third rate hike before the end of the year.
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.