Is it time to get in the pool or jump out of it? I’m talking about the liquidity-filled equity market, jacked up on years of excess money floating through the system. This era could end with a period of much higher interest rates. If that does occur, one great gift to bring to that event is an exchange-traded fund (ETF) that invests primarily in floating-rate securities.
“Floaters” are bonds whose interest rates are reset regularly (e.g., quarterly) to allow bondholders to keep up with rising rates.
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Of course, if rates fall, the floating rate falls as well. However, many of these bonds, and thus the ETFs that hold them, experience very low volatility in their principal values. So there can be a bit of arbitrage at times in T-bill ETFs like the BBG 1-3 Month T-Bill SPDR ETF (BIL) and the iShares 0-3 Month Treasury Bond ETF (SGOV), which hold very short-term bonds and thus reflect frequent changes in those rates as T-bills mature.
I chose to show the iShares Treasury Floating Rate Bond ETF (TFLO), the iShares Floating Rate Bond ETF (FLOT), and the Wisdomtree Floating Rate Treasury Fund (USFR) in that table above, without their income payments included in the growth (returns) section. That’s so you can see just how little price movement there is here. The rate paid on the investment will fluctuate, but the principal stays about where you bought it, except in extreme circumstances.
Unlike standard fixed-coupon debt instruments that face clear principal erosion when macro yields stall at elevated levels, floating-rate vehicles carry variable payouts that systematically adjust to underlying short-term interest rate benchmarks, effectively insulating investors from ongoing duration risk. As you can probably tell, USFR and TFLO are very similar funds. They own U.S. Treasury floaters with short-term maturities, typically one to three years.
Here is TFLO’s total return chart — five years and a steady appreciation level. Once rates lifted off of zero, these vehicles came back to life.
FLOT is a bit different, as it goes beyond U.S. Treasury securities, investing mostly in corporate credits, but still those with floating rates. As we see here, it owns more than 500 different bonds, so it is somewhat diversified by creditor.
