Investors and advisors know by now that fixed income is back. Yields have risen to places they haven’t been in a long time. Just as that’s happened, however, bank volatility and government turmoil have roiled markets, including some parts of fixed income. Investors looking for durable yields might consider a floating rate Treasury ETF like the WisdomTree Floating Rate Treasury Fund (USFR).
The burgeoning ETF has not only maintained steady inflows over the last year but also significant totals. USFR has added no fewer than $10.88 billion in inflows over the last year. Those inflows point to robust investor faith in the merits of the floating rate notes (FRNs) in which USFR invests.
See more: “The ABCs of FRNs: Get Floating Rate Note Yields in USFR”
The U.S. Treasury auctions off FRNs regularly, with an interest rate comprised of two parts: index rate and spread. The index rate stems from the highest discount rate of the most recent 13-week Treasury, resetting weekly with each auction. The second portion, the spread, comes from those auctions, the highest accepted discount margin in a given option.
FRNs mature in two years and pay interest four times each year, a notable asset in a volatile macro environment. Perhaps even more importantly, those FRNs offer a rate combining the spread and index rates described above. All of this arrives at the cost of just 15 basis points, which helps make USFR a pretty affordable long-term hold.
What kind of advisors and investors might want to look into a floating rate Treasury ETF? Those who still have yet to diversify their equities into a bit more fixed income may qualify. Not only does a looming recession threaten equities, but a U.S. default would worsen that outlook even more.
Investors may be worried about how a default would impact USFR, but there are points in its favor despite said concerns. USFR’s FRNs have maturities of about 1-2 years and may be an interesting alternative to other more exposed bonds.
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