Fixed income investors have been focused on the Fed’s “will they, won’t they” approach to rate cuts to start 2024. However, too much focus on Fed signals may be distracting those investors from some significant current opportunities. The yield curve remains inverted, with short or even ultra-short duration still appealing. A floating rate note ETF like USFR, with its ability to limit volatility and access potent yields, may merit a closer look.
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The WisdomTree Floating Rate Treasury Fund (USFR) tracks the Bloomberg U.S. Treasury Floating Rate Bond Index. For a 15 basis point (bps) fee, it offers exposure to so-called “floating rate notes” or FRNs. FRNs arrived a decade or so ago as the most recent Treasury product variation from the Federal Reserve, offering a rate tied to the most recent 90 day auction.
By investing in those Treasuries, USFR offers a 5.5% average yield to maturity. That is about 60 bps more than what is offered by the volatile Bloomberg U.S. Aggregate Total Return Index, or the Agg, of late.
The Role of Floating Rate Note ETF USFR
Given that the yield curve remains inverted, FRNs remain an appealing option. Indeed, yields would “more than likely” be close or above current fixed coupon Treasury yields even with as much as 100 bps of cuts this year, per WisdomTree analysis.
The floating rate note ETF has gathered nearly $4 billion in AUM over the last one year per VettaFi data. On top of the yields in its FRNs, USFR itself has returned 5.5% over the last one year. That total has helped it outperform both its ETF Database Category and Factset Segment averages over the last one year period. With many investors looking to move out of cash, the floating rate note ETF could be one solid option to consider.
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