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The Short Answer

Don't Get Carried Away With Floating-Rate Funds

Yes, they offer protection against a rise in interest rates, but they also can add credit risk.

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Question: A friend recommended I look into floating-rate funds for my fixed-income portfolio to protect against a rise in interest rates. How do these funds work, and how do I know if they're right for me?

Answer: Given many financial professionals' expectations that interest rates will rise in the not-too-distant future, it's no wonder many fixed-income investors are considering floating-rate funds for their portfolios. The advantage these funds have over other fixed-income funds is that the interest they pay adjusts along with market interest rates. This adjustment typically happens on a quarterly basis and is based on LIBOR plus a spread.

Adam Zoll does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.