WisdomTree, the New York-based fifth largest provider of exchange-traded funds in the US, unveiled the WisdomTree Bloomberg Floating Rate Treasury Fund (USFR) recently to tap into the growing demand for floating rate debt.
As historically low interest rates start to normalize, bond prices – particularly the longer duration debt will start to slide, and thus the demand for shorter duration floating rate debt to mitigate interest rate risk.
The new fund provides exposure in floating rate notes, or FRNs, and pays floating coupons quarterly. The variable interest rate will be reset every week and is calculated by adding a predetermined spread over a short-term interest rate, in this case yield on the most recent 13-week Treasury bill auction. This is the US govt’s first FRN offering and the first time since 1997 the US Treasury debuted a new security for investors.
The passively managed USFR is linked to the Bloomberg US Treasury Floating Rate Bond Index, a newly-introduced rules-based and market-value weighted index comprising of the first-issued Treasury FRNs that rebalances every month.
USFR yields are likely to be very low and the fund should find favor with investors that are keen to protect their capital and eliminate interest rate risks from their portfolio.
Although floating rate debts are designed to pay higher interest rates when Treasury yields rise – which could be a couple of years or more away, it doesn’t mean FRN yields will rise immediately after a short-term rate hike.
For example, a typical floating rate debt may have a 200 bps spread over LIBOR, with a LIBOR floor of 0.5 percent. That means if the yield today for investors is 2.5 percent, they get 0.30 percent more than what they would get based on the current LIBOR rate of 0.20 percent.
However, if the LIBOR rises to 0.5 percent, yield would still remain the same. The payouts increase only when LIBOR rises above 0.5 percent.
USFR has a net annual expense ratio of 0.15 percent.
Disclosure: No holdings
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