3. The One Who Wants It All
There are investors who want to take some interest-rate risk off the table but they still want to participate, or “benefit,” when the Fed does begin to raise interest rates, Tucker says. For these folks, the most appealing category of fixed-income ETFs is those comprising floating-rate securities.
Floating-rate bonds have a coupon payment that resets regularly, and are often linked to the Libor, which in turn is tied to the fed funds rate.
“What you will see is that if the Fed raises interest rates, the actual coupon and yields from the fund will increase along with rising rates,” Tucker said. “That’s a way of not only being defensive against rising rates, but benefiting from when rates do move higher in the short end.”
The iShares Floating Rate Bond ETF (FLOT | B-98) is one of the biggest in the segment, with some $3.5 billion in assets. The fund owns investment-grade floating-rate corporate bonds with maturities of zero to five years.
Other options include the SPDR Barclays Investment Grade Floating Rate ETF (FLRN | B-98), which has $389 million in assets, and the Market Vectors Investment Grade Floating Rate (FLTR | B-72), with $79 million in AUM.