A Bond ETF To Consider Right Now

Some fixed income investors are fretting about the idea of a rate hike by the Federal Reserve, perhaps as soon as later this month. However, there are some exchange-traded funds that offer investors exposure to corners of the bond world that can be durable in the face of rising rates.

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.

A Floating Rate ETF To Consider

The WisdomTree Bloomberg Floating Rate Treasury Fund USFR, which debuted three 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.

“Investors looking to mitigate potential interest rate exposure may also wish to examine the benefit of floating rate Treasury notes (FRNs). Given the outlook for the Fed Funds Rate in 2017, some “Fed protection” seems warranted," WisdomTree said in a recent note.

"Against this backdrop, we feel that by utilizing a floating rate product such as the WisdomTree Bloomberg Floating Rate Treasury Fund (USFR), investors may be better able to insulate their bond portfolio as compared to a more traditional short-duration and/or inflation-protected fixed income investment."

USFR's 30-day SEC yield is just under .5 percent, which is the rub investors take on with floating rates: Trading yield for protection from higher interest rates. Of course, USFR is an ultra-low duration ETF with an effective duration of just 0.02 years.

For investors considering bonds in today's environment, it's notable that floating rate notes have a legacy of success during eras of rising rates.

An Asset Class Deserving A Second Look

“While it is a relatively new asset class, floating rate Treasury notes have had some proven success during prior rate hike environments, and investors should look to use them as alternatives to traditional short-term Treasuries," WisdomTree said, adding that FRNs are 2-year notes which reset weekly to the rate of the newly auctioned 13-week bill.

"Put simply, these bonds have a one-week duration, because any risk of missed opportunity of investing in higher-yielding bonds is mitigated by the weekly rate reset."

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