ETF of the Week: WisdomTree Barclays Yield Enhanced U.S. Short-Term Aggregate Bond Fund (BATS: SHAG)
Floaters have some advantages of TIPS. 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.
“FRNs are more directly tied to changes in interest rates, specifically Fed rate moves, while TIPS are more directly tied to changes in inflation. These two factors don’t always move in tandem, with 2017 being a perfect example. To illustrate, last year, the Fed raised rates three times (75 basis points [bps]) while CPI finished 2017 at a year-over-year rate of +2.1%, identical to the 2016 pace,” according to WisdomTree.
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