Prior to the Federal Reserve’s September interest rate cuts — the central bank’s first in four years — floating rate notes and the related exchange traded funds were among investors’ best friends in the bond market.
The Fed cut rates again last month. It is expected to continue doing so in 2025. Monetary easing, however, doesn’t necessarily dampen the case for “floaters” and ETFs such as the WisdomTree Floating Rate Treasury Fund (USFR). Confirming that rate cuts aren’t making floaters less desirable, USFR is up 1.2% for the 90 days ending December 5. Meanwhile, the Bloomberg Aggregate Bond Index slid 1.2% over that span.
That extends USFR’s 2024 outperformance of “the Agg.” With 2025 right around the corner, advisors and investors may want to take this opportunity to evaluate the WisdomTree ETF in preparation of potential bond market volatility next year.
Using USFR in a Barbell
Due to its lack of sensitivity to interest rate changes, USFR can be a complement to other fixed income exposures within a portfolio. That also confirms the ETF can work well in a barbell — the scenario in which a portfolio includes various bond segments with different allocations.
“In my opinion, Treasury floating rate notes (FRNs) offer bond investors an approach that can be combined, or ‘barbelled,’ with other fixed income solutions when building a portfolio,” noted Kevin Flanagan, head of fixed income strategy at WisdomTree. “Treasury FRNs are backed by the full faith and credit of the U.S. government and are reset with the weekly UST 3-Month t-bill auction and an accompanying spread. The WisdomTree Floating Rate Treasury Fund (USFR) allows investors to invest in this asset class in a user-friendly ETF structure.”
Said another way, USFR offers fixed income investors the credit quality benefits associated with traditional Treasury offerings with potential for superior upside, even as interest rates normalize or continue declining.
Even if the Fed continues easing, it can pay for investors to hold some duration protection in their portfolios. USFR checks that box. Add to that, floating rate notes display favorable volatility traits relative to other corners of the Treasury market. Add it all up and, while rates might fall in 2025, USFR remains relevant to bond investors.
“Interest rates have now returned to a more normal historical setting. And, even with rate cuts, investors could still be presented with what is viewed as a ‘higher for longer’ regime compared to what many market participants had been accustomed to during the 2010–2021 period,” added Flanagan.
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