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After a short break, U.S. yields started to rise again as investors weighed the prospects of a longer-than-anticipated stiff monetary policy stance by the Fed following continued strong economic data. The 10-year Treasury yields hit the highest level since Nov 10 at 3.9% while 2-year yields topped 4.7%, nearing a 15-year-high and the highest mark since Nov 7.

With the renewed rally in yields, many floating-rate bond ETFs are hitting new highs. Investors seeking to tap the opportune moment could flock to these ETFs. Investors currently have five floating rate bond ETFs — iShares Floating Rate Bond ETF (FLOT - Free Report), SPDR Bloomberg Investment Grade Floating Rate ETF (FLRN - Free Report), WisdomTree Floating Rate Treasury Fund (USFR - Free Report), VanEck IG Floating Rate ETF (FLTR - Free Report) and Invesco Variable Rate Investment Grade ETF (VRIG - Free Report) — any of which could make a compelling choice.

Yields on the Rise

The series of latest data indicates the economy's resilience despite the Fed's monetary policy actions and will probably call for more rate hikes to cool inflation. Hiring surprisingly surged with the economy adding a solid 517,000 jobs in January. The unemployment rate fell from 3.5% to 3.4%, the lowest since 1969.  

Inflation jumped more than expected at the start of 2023, but the annual increase was the lowest since October 2021. The consumer price index rose 0.5% in January following a 0.1% increase in December. It climbed 6.4% year over year, almost steady with a 6.5% increase in December but down from a peak of 9.1% in June.

The business activity unexpectedly rebounded in February, reaching its highest level in eight months, underscoring the resilience of the economy despite the Fed's monetary policy actions. Meanwhile, U.S. builder confidence has risen for the second consecutive month in February to the highest level since September 2022.

Last week, the Fed signaled that the central bank was likely to keep raising interest rates for longer than was previously forecast in its bid to tame inflation. The Fed raised rates by 25 bps last month after hiking 475 bps last year in the fastest hikes since the 1980s. According to the CME Group’s FedWatch tool, traders saw a 76% chance of the Fed raising rates by 50 bps in March and a 24% chance of a 50 bps increase.

Why Floating Rate Bonds?

Floating rate bonds are investment grade and do not pay a fixed rate to investors. However, these have variable coupon rates that are often tied to an underlying index (such as LIBOR) plus a variable spread depending on the credit risk of the issuers.

Since the coupons of these bonds are adjusted periodically, these are less sensitive to an increase in rates compared to traditional bonds. Unlike fixed-coupon bonds, these do not lose value when the rates go up, making the bonds ideal for protecting investors against capital erosion in a rising rate environment.

We detailed the above-mentioned ETFs here:

iShares Floating Rate Bond ETF (FLOT)

iShares Floating Rate Bond ETF follows the Bloomberg US Floating Rate Note < 5 Years Index and holds 367 securities in its basket. It has an average maturity of 1.64 years and an effective duration of 0.06 years. iShares Floating Rate Bond ETF focuses on better quality notes, with 85% of them rated A or higher.

iShares Floating Rate Bond ETF has amassed $8.2 billion in its asset base while trading in a volume of 1.7 million shares per day on average. It charges 15 bps in annual fees.

SPDR Barclays Investment Grade Floating Rate ETF (FLRN)

SPDR Barclays Investment Grade Floating Rate ETF tracks the Bloomberg U.S. Dollar Floating Rate Note < 5 Years Index with an average maturity of 1.82 years and an adjusted duration of 0.03 years. It holds 362 securities, with the top-rated bonds (A or higher) accounting for an 88% share.

SPDR Barclays Investment Grade Floating Rate ETF has AUM of $2.8 billion and charges 15 bps in annual fees. Volume is solid at around 988,000 shares a day on average.

WisdomTree Floating Rate Treasury Fund (USFR)

WisdomTree Floating Rate Treasury Fund offers exposure to short-term government bond solution that fluctuates with most recent 3-month Treasury Bills. It follows the Bloomberg U.S. Treasury Floating Rate Bond Index with an average maturity of 1.50 years and and effective duration of 0.02 years.

WisdomTree Floating Rate Treasury Fund has AUM of $13.5 billion and trades in an average daily volume of 3.6 million shares. It charges 15 bps in annual fees.

VanEck IG Floating Rate ETF (FLTR)

VanEck IG Floating Rate ETF follows the MVIS US Investment Grade Floating Rate Index, which consists of U.S. dollar-denominated floating rate notes issued by corporate issuers and rated investment grade. Holding 169 securities, it has average years to maturity of 3.02 and a modified duration of 0.05 years.

VanEck IG Floating Rate ETF has accumulated $1.1 billion in its asset base and trades in an average daily volume of 504,000 shares. The expense ratio came in at 0.14%.

Invesco Variable Rate Investment Grade ETF (VRIG)

Investors seeking an active approach could find VRIG an exciting pick. Invesco Variable Rate Investment Grade ETF seeks to invest at least 80% of its net assets in a portfolio of investment-grade, variable rate instruments that are U.S. dollar-denominated and U.S.-issued. It holds 226 bonds in its basket and has amassed $562.6 million in its asset base.

Invesco Variable Rate Investment Grade ETF trades in an average daily volume of 180,000 shares and charges 31 bps in annual fees.

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