Underscoring investors’ preference for conservative bond fare that is less sensitive to changes in interest rates, the iShares Treasury Floating Rate ETF (NYSEArca: TFLO) hit a three-month high Monday. TFLO was one of just two exchange traded funds to notch that accomplishment.
TFLO, which tracks the Bloomberg Barclays US Treasury Floating Rate Bond Index, provides exposure to U.S. floating rate Treasury bonds, whose interest payments adjust to reflect changes in interest rates.
TFLO limits duration exposure with investments in debt securities with maturities that don’t exceed two 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. The floating rate allows investors to capitalize on any short-term interest rate adjustments in accordance with monetary policy.
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.
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TFLO ETF Details
TFLO’s effective duration is a scant 0.01 years, according to issuer data. Duration measures a bond’s sensitivity to changes in interest rates.