With the Fed preparing to meet once again this week for a much anticipated rate hike, how should investors respond? The yield curve remains inverted, offering significant opportunities on the front end that investors and advisors can still reap. Whether this rate hike will be the last one or not in the Fed’s ongoing inflation fight, a treasury yield ETF might stand out. Investors may want to consider how the WisdomTree Floating Rate Treasury Fund (USFR) can fit the role there.
The Fed sat down to meet Tuesday and looks set for a 25 basis point (bps) hike. That would likely take the rate above its current range of 5% to 5.25% as part of the Fed’s breakneck rate hike pace. Fixed income has come back this year, in turn, but investors don’t need to take huge swings to find solid yields. One strong option to play another rate hike may actually be in USFR, which invests in Floating Rate Notes (FRNs).
Floating Rate Notes are the newest variation on Treasury securities, launched back in 2013. FRNs are indexed to the most recent 13-week Treasury bill auction, held quarterly. FRNs offer quarterly coupons though that can vary. Crucially, the rate attached to an FRN changes as rates change. That means FRNs can benefit from, say, a rate hike.
The Treasury yield ETF USFR uses FRNs to offer a very low risk way into exposure to rates. While that does pose reinvestment risk if rates fall, markets are anticipating further hikes and then, perhaps, a higher for longer regime. These have helped USFR return 2.9% YTD, adding $375 million over the last month.
USFR charges just 15 bps and currently offers a 5.5% average yield to maturity as of July 24th. That yield, above five, may encourage investors to take a closer look especially if it rises with another rate hike. For those investors looking for a Treasury yield ETF, USFR may be positioned for an intriguing end to 2023.
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