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A Cheap Tool for Interest-Rate Worriers

At 20 basis points, iShares Floating Rate Bond Fund ETF is the cheapest way to get exposure to investment-grade floating-rate bonds, which can help hedge against rising interest rates.

A Cheap Tool for Interest-Rate Worriers

Thomas Boccellari: Investors who are worried about short-term interest rates increasing may consider iShares Floating Rate Bond ETF (FLOT)--a passively managed ETF that buys investment-grade floating-rate bonds. Issuers include U.S. agencies--such as Fannie Mae and Freddie Mac--financial institutions, and other high-quality issuers.

Traditional bond funds generally invest in fixed-rate bonds. This becomes troublesome in a rising-rate environment because of the inverse relationship between bond prices and interest rates. So, if interest rates are rising, your income level remains the same; however, prices adjust down, which can increase your principal loss.

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Thomas Boccellari does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.