Combat Rising Interest Rates With This Low-Credit-Risk ETF
This fund protects against rising rates.
IShares Floating Rate Bond ETF (FLOT) is a solid option for investors worried about rising interest rates and credit risk. This low-fee fund invests in investment-grade corporate bonds whose interest payments grow as rates rise. It was recently upgraded to a Morningstar Analyst Rating of Bronze from Neutral based on a reassessment of its fee relative to its competitors.
The fund tracks the Bloomberg Barclays U.S. Floating Rate Note < 5 Years Index, which offers market-cap-weighted exposure to investment-grade, variable interest-rate bonds with less than five years until maturity. These bonds tie their coupon payments to the three-month London Interbank Offer Rate. So, when rates rise, they offer higher coupon payments and their prices don’t fall as much as fixed-rate bonds. In contrast, most funds in the ultrashort-bond Morningstar Category invest in fixed-rate corporate and government bonds with less than three years remaining until maturity. The fund effectively protects against rising rates, but it does take moderate credit risk and loses out when rates fall.
Phillip Yoo does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.