Get Friendly With Floaters With This ETF

Led by U.S. government bond funds, fixed income exchange traded funds are receiving plenty of attention (and new assets) this year. A big reason is declining Treasury yields, which are bolstering the allure of income plays as capital appreciation destinations.

Additionally, speculation is increasing that the Federal Reserve may not be able to raise interest rates as many times this year as previously believed. Should higher rate momentum be renewed, floating rate notes are an asset class worth revisiting.

Floating rate notes have a so-called reset period with interest rates tied to a benchmark, such as the Fed funds, LIBOR, prime rate or U.S. Treasury bill rate, according to ETF Trends. 

The WisdomTree Bloomberg Floating Rate Treasury Fund USFR, which debuted two years ago, is one avenue investors can use for exposure to floating rate bonds. USFR follows the Bloomberg U.S. Treasury Floating Rate Bond Index.

Due to its low duration (just 0.02 years), USFR's yield is not jaw-dropping (just 0.29 percent on a 30-day basis), but that is the trade-off investors must deal when considering bond ETFs that minimize interest rate risk. USFR and floating rate notes have other advantages.

“Many investors employ a common strategy of rolling their Treasury Bill holdings every quarter. Investing in USFRNs, enables the investor to avoid the cost of eight purchases of T-bills over a two-year period. Not only does the investor reduce transaction costs, but USFRNs typically offer a spread over three-month Treasury Bills as compensation for holding the investment longer,” said WisdomTree in a recent note. 

Additionally, floating rate notes are attractive relative to one- to three-month and one- to 12-month Treasury Bills.

“Compared to one- to three-month and one- to 12-month Treasury Bills, U.S. floating rate notes have similar credit quality, lower interest rate risk and the same to higher yield. Since the Fed is more likely to increase interest rates than to decrease them, investors should consider using U.S. floating rate notes as part of their short-term bond or cash allocations,” adds WisdomTree.

All of USFR's holdings are rated AA. The ETF charges 0.15 percent per year, or $15 for each $10,000 invested.