Aadvisors looking to liquidate their fixed income positions should think twice, at least as far as WisdomTree Floating Rate Cash Fund (USFR)which generated $1.12 billion in net inflows in April alone and over $2 billion in total inflows in 2022.
Many of the more traditional allocations within fixed income securities have proven problematic in the current environment of high inflation and rising rates. Kevin Flanagan, head of fixed income strategy at WisdomTree, explains on a call with ETF Trends that TIPs are problematic because they are CPI-adjusted and therefore linked to inflation, while short duration, which tends to rely heavily on credit, suffers when spreads widen.
“When you’re talking to your client as an advisor, the last thing they want is to have a conversation about why that rate-hedged product you sold me is producing negative returns,” says Flanagan. .
For advisors and investors looking for a fund that can potentially provide rate hedging for portfolios, the WisdomTree Floating Rate Cash Fund (USFR) is a popular choice in today’s market environment. The fund capitalizes on the use of floating rate notes by the US Treasury and can be an excellent option for investors looking to limit the amount of credit risk, while capturing higher return potentials in rate environments. rising.
The advantages of floating rate Treasury bills
WisdomTree believes that floating rate debt is an important bridge between long-term, fixed-rate treasury bills and short-term treasury bills. By investing in floating rate treasury bills, holders are paid quarterly and the amount paid is based on a rate that resets daily with reference to a weekly rate. This can be a good option if treasury bond yields rise, as it offers the possibility of better compensation compared to a fixed rate bond.
Another advantage of the variable rate is that price volatility can be somewhat mitigated by daily resets compared to fixed income bonds. Floating rate treasury bills are a good option when the yield curve is flat or inverted.
“What we’re seeing, we’ve seen in the last rate hike cycle and we’re also seeing now: three-month Treasuries tend to get ahead of the Fed meeting, so he’s not waiting for the Fed will raise rates by 50 basis points,” says Flanagan. “If you actually look at the USFR yield right now, I think it’s around 80-85 basis points. The upper end of the federal funds rate is 50 basis points; you are already 30 to 35 basis points ahead and the Fed has done nothing.
USFR seeks to track the Bloomberg US Treasury Floating Rate Bond Index, which measures the performance of US Treasury Floating Rate Bonds and contains floating rate bonds with two-year maturities and a minimum outstanding amount of $1 billion. dollars. The index uses a rules-based strategy and is weighted by market capitalization. The index excludes fixed rate securities, Treasury inflation-protected securities, convertible bonds and bonds with survivor put options.
USFR has an expense ratio of 0.15%.
For more news, insights and strategy visit the Modern Alpha Channel.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.