The WisdomTree Floating Rate Treasury Fund (USFR) turned 10 years old in February. It’s been an impressive decade for the exchange traded fund.
Now home to $17.52 billion in assets under management, USFR debuted just days after the U.S. Treasury’s first floating rate note (FRN) auction. It’s now one of the largest ETFs in this category. At that time, FRNs were the first new class of bonds issued by the Treasury Department since the debut of Treasury Inflation-Protected Securities (TIPS) 17 years prior.
“We’re thrilled to celebrate the 10-year anniversary of USFR, but what’s more is its incredible runway is still intact,” said Kevin Flanagan, head of fixed income strategy at WisdomTree. “While, initially, investors viewed it as a rate hedge strategy and gravitated to it when the Fed was tightening monetary policy, it has proven to have a strategic place in investors’ portfolios for all different types of rate landscapes. We believe it’s one for investors to consider from the current and prospective interest rate landscape.”
Floating Rate ETF USFR Earning Its Stripes
Floating rate Treasurys, including the bonds held by USFR, are usually less sensitive to changes in interest rates than fixed rate securities. That implies an ETF such as USFR should thrive when the Federal Reserve is in a tightening cycle. USFR has delivered on that front. For the three years ending March 25, the WisdomTree ETF gained 8.7%, while the widely followed Bloomberg U.S. Aggregate Bond Index slumped 7.7%.
Not surprisingly, USFR was also significantly less volatile than “the Agg” over that period. However, those performance metrics don’t imply that USFR needs tightening to thrive. Over the past year, USFR beat the Agg by a margin of more than 5-to-1.
USFR has also presented advisors and fixed income investors with a credible alternative to TIPS at a time when inflation proved stickier than initially expected. While USFR excelled over the past three years, the largest TIPS ETF disappointed, declining 2.7%. Even with the pace of inflation cooling over the past year, the WisdomTree fund has maintained a significant advantage over competing TIPS ETFs.
Past performance isn’t a guarantee of future returns. But it’s clear FRNs are becoming staples of fixed income portfolios. USFR provides efficient access to an increasingly important corner of the bond market.
“U.S. Treasury floating rate notes have grown to become an integral aspect for investors’ fixed income portfolios. In the new rate regime, floating rate Treasury Securities represent an effective way for investors to help reduce their exposure to volatility while also generating income payments that are backed by the full faith and credit of the U.S. government,” added WisdomTree.
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