Floating rate bonds adjust quickly to interest rate changes. Here we'll check out the best floating rate ETFs for 2024.
// TIMESTAMPS:
00:00 - Intro
00:05 - What Are Floating Rate Bonds?
03:12 - Floating Rate Bond ETFs
03:18 - USFR
03:54 - TFLO
04:26 - FLOT
05:06 - Outro
// SUMMARY:
Floating rate bonds are debt instruments with variable interest rates, as opposed to a typical bond with a fixed rate. That interest rate is based on some benchmark, which could be things like the U.S. 3-month T-bill rate, the Federal Funds Rate (FFR), and the London Interbank Offered Rate (LIBOR).
Floating rate bonds are also called floating rate notes (FRN's) or simply floaters. Relatively speaking, FRN's are very new; they were created in 2013. They have gotten much more attention recently since interest rates have been going up.
Floating rate bonds capture current interest rates, plain and simple, for better or worse. If rates rise, you immediately get that higher rate. The opposite is also true, though; if rates drop, your bond's interest rate immediately drops as well. How often the FRN's rate updates is up to the issuer. This could be once a day or once a year.
Floating rate bonds are typically short-term, investment-grade debt issues from institutions, governments, agencies, or corporations.
Practically speaking, it's a pretty close toss-up between floaters and a straight T-bills ETF like SGOV, to which you're probably wanting to compare. While floaters may seem like a free lunch right now with rates rising, there's really no objective benefit of FRN's over T-bills due to what I just noted about them immediately dropping if rates drop. But they are also no worse.
Trying to predict interest rate changes and the bond market is typically just as fruitless as trying to time the stock market. It's also worth noting that floating rate bond funds typically have higher fees than their fixed-rate counterparts, so a slightly higher yield may not compensate for that greater fee.
Under a “normal,” rising yield curve, we also expect longer term bonds to have higher yields, and floating rate bonds are indexed to short-term rates, so their yield may be lower than a fixed rate bond of a slightly longer maturity.
Now let's go over the best floating rate bond ETFs:
USFR
TFLO
FLOT
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#interestrates #bonds #treasurybonds
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