A Smart Beta Bond ETF for Rising Interest Rates

FLTR provides exposure to notes that 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.

Looking ahead, the floating rate notes will generate more interest if Treasury prices fall and yields rise further, which should play out if the Fed continues on its interest rate normalization schedule. In a shifting interest rate environment, with the Federal Reserve eyeing a tighter monetary policy ahead, fixed-income ETF investors have to adapt to the changing market and look beyond the potential short-comings of traditional benchmarks like the Bloomberg Barclays U.S. Aggregate Bond Index, or so-called Agg.

Related: 4 Floating Rate ETFs for an Alternative to Cash

However, given FLTR’s tilt toward corporate debt, which includes a hefty 77.7% tilt toward the financial sector, the fund exposes investors to greater credit risks. The ETF’s portfolio includes a greater weight toward lower investment-grade debt, including 40.2% BBB, 45.3% A, 13.8% AA and 0.7% AAA.

Nevertheless, “if the economy continues to improve and rates go up at a controlled pace, I think credit risk is lower,” Lopez said.

For more information on the fixed-income markets, visit our Fixed Income Channel.