While the Federal Reserve has eased off the pedal on interest rate hikes, investors are still looking into alternative bond ETF strategies, like those that track floating rate notes, ahead any further tightening.
For example, the WisdomTree Bloomberg Floating Rate Treasury Fund (NYSEArca: USFR), which follows the Bloomberg U.S. Treasury Floating Rate Bond Index, focuses on floating rate notes. Instead of paying a fixed rate of interest like other Treasuries, floating rate note coupon payments are based on a reference rate (90-day t-bills) plus a spread. Since 90-day bills are auctioned every week, the effective duration of floating rate notes is one week, which allows investors to capture higher rates of income as short-term rates rise. This also provides an opportunity for investors to boost income as the Federal Reserve hikes interest rates.
Even without a rate hike, the flat or inverted yield curve in today’s market may allow investors to generate attractive yields with something like a floating rate bond ETF without being exposed to duration risk. USFR shows a 2.33% 30-day SEC yield and a 0.02 year effective duration.
USFR “is the fastest rate-capturing instrument out there. And actually, it became so popular last year that at the beginning of the year, we were at a million dollars. By the end of the year, we were at a billion. And into the new year as the Fed has taken its foot off the gas a little bit, investors are still looking for a more safer rate capture instrument and we are already at $2 billion,” Anita Rausch, Head of Capital Markets for WisdomTree, said at Inside ETFs.
USFR has accumulated $2.3 billion in assets under management. The ETF attracted $1.2 billion over 2018 and brought in another $1.1 billion so far this year.
Watch the full interview between Tom Lydon and Anita Rausch here:
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