Fixed-Income ETFs to Watch After Fed’s Policy Decision

After a two-day monetary policy meeting, the Federal Reserve’s Federal Open Market Committee decided to keep interest rates unchanged on Wednesday. Nonetheless, that decision didn’t alter their hawkishness on the state of the economy after they upgraded it to “strong.”

With the Fed’s vote of confidence in the economy, the prospect for more rate hikes to come through the rest of 2018 is almost certain. The Fed stated that the labor market has “continued to strengthen,” fortified by evidence of data regarding private payrolls, which increased in July by 219,000 versus an expected 185,000.

The upgraded view on the economy came after the Commerce Department reported that GDP grew at a 4.1 percent rate in the second quarter, which represents its fastest growth rate in nearly four years. Given this data, fixed-income investors need to adjust their strategies to accommodate the likelihood that rates will in fact rise.

“This steady as it goes…mail it in (Fed) statement likely means the Fed will stick with” its plan for two more rate hikes this year, says Scott Anderson, chief economist of Bank of the West.

Related: The Secret to Investing in Real Estate ETFs

As such, one ETF to watch is the iShares Floating Rate Bond ETF (BATS: FLOT), which tracks the investment results of the Bloomberg Barclays US Floating Rate Note < 5 Years Index. The ETF focuses on investment-grade floating rate notes that track the underlying index, which has been on an upward trajectory looking at its year-to-date chart.

The floating rate component will allow investors to capture any gains from short-term rate adjustments that the Fed will most likely make. Based on performance provided by Yahoo! Finance, FLOT has generated trailing returns of 1.18% year-to-date, 1.90% the past year and 1.44% the past three years. Versus similar benchmarks in its category, FLOT is outperforming its peers by 10.28% year-to-date and 68.14% the past year.

Like FLOT, the SPDR Blmbg Barclays Inv Grd Flt Rt ETF (NYSEArca: FLRN) features a floating rate component that will be beneficial in hedging interest rate risk. FLRN also seeks to provide investment results that correlate with the price and yield performance of the Bloomberg Barclays U.S. Dollar Floating Rate Note < 5 Years Index. FLRN limits duration exposure with investments in debt securities with maturities that don’t exceed five years. In addition, at least 80% of its assets will be allocated towards securities comprising the index, such as U.S. dollar-denominated, investment grade floating rate notes.

For more fixed-income trends, visit the Fixed Income Channel.