USFR: This ETF could help add income to your portfolio

Floats are instruments that, when used correctly, can help preserve a portfolio’s capital during periods of rising rates.

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Since the Federal Reserve launched its last rate hike program, we have had more and more of our family and friends contact us with questions about the bond funds offered by their 401(k) plans. Many thought they owned bonds that would hold their value in times of stress and were surprised to realize that duration can actually crush your returns in certain environments. Worse still, some of their short term bond funds (which had relatively short durations) performed poorly and when we started reviewing some of these products we were left speechless. Indeed, on the institutional side it would be quite easy to rectify what ails their portfolios with a few trades on the fixed income side, however, these weren’t institutional investors so we had to look at what was proposed and, in some cases, find solutions for portfolios (where they had the discretion and ability to source their own funds) to better protect assets that were not supposed to have a lot of volatility.

A useful product

One product we came across (and ticked quite a few boxes) was the WisdomTree Floating Rate Treasury ETF (NYSEARCA:USFR) which has an expense ratio of 0.15% and approximately $5.75 billion in assets under management. We view this product as an ETF that can be used to maintain a relatively stable net asset value for the cash equivalents in your portfolio and although the price will fluctuate, we would point out that the 52 week high is $50.39 (fixed on 02/05/2022) and the 52 week low is $50.1758 (set on 07/01/2021) – a very narrow range for a product that allows you to mount higher rates. We have also attached a chart below to show that most of this price volatility has occurred since the start of the year due to floats with positive spreads (of which this fund has a few) trading heavily .

Data by YCharts

Part of the reason the price remains relatively stable is that it essentially holds 100% exposure to floating rate notes issued by the US Treasury. We have used floats as a means of hedging fixed income portfolios during periods of rising rates; helping us benefit from increased interest payments while protecting principal that would otherwise come under pressure as rates rise. This product performs the same function, with each of the floating rate bonds held by the fund being compared to the money market yield of 3-month US Treasury bills +/- an issue spread (which could change if purchased on secondary market). Essentially when you buy a float you are trading the spread above whatever the float is calibrated to (the benchmark is your base rate which will reset depending on the structure of the bond – which can be daily, weekly, monthly, quarterly, semi-annually, etc. – but in this case the reset will be weekly).

Fund structure

The current holdings of the WisdomTree Floating Rate Cash ETF are shown in the table below:

USFR ETF Securities

As floats have become more popular in recent months, spreads have turned negative, but investors are still benefiting from resets. (WisdomTree, Bloomberg, author)

We will point out that the fund holds cash and that we had to round the % of the fund for each of the holdings, so it does not add up exactly to 100%. Also important, we’ve included a column that shows the issue spread of floats in the fund. This shows how much the floating market changes with demand; in times of low demand due to low rate hike expectations, investors can collect decent positive spreads (as shown by positive spreads on 2023 maturities), and when rate hike expectations rise, spreads can ( as they did in this case for the 2024 maturities) turn negative as investors are expected to benefit from rising rates and resets, thus requiring less spread, no spread, or even negative spread . Generally we prefer positive spreads on our floats when the market is inevitably turning, but in this market and in an effort to try and protect capital while participating in rising rates, we believe it is of a decent short-term cash vehicle to use.

As we mentioned earlier, the underlying float rates reset weekly (based on the results of the last 13-week paper treasury bill auction), so this fund currently benefits from the Fed interest rate tightening and investor perception. the aggressiveness of the Fed in the future. While rates reset weekly, interest is paid quarterly on the underlying holdings, but this ETF pays out monthly interest distributions to investors, which is another great feature when you use it as an indicator. cash in your wallet. The distribution for May was $0.029/share and based on the trend in rates over the past few weeks, we expect the distribution to be between $0.03/share and $0.035/share next month.

Our final thoughts

As the US Federal Reserve continues to raise rates and is expected to raise rates by 50 basis points at each of the next two meetings, we believe the WisdomTree Floating Rate Treasury ETF could be used as a cash vehicle to preserve capital and potentially generate additional revenue. interest income for his portfolio. While a corporate floating fund can provide richer spreads, thus generating more interest income, we like the focus here on cash in order to try and avoid ‘breaking the ball’ while still participating in a structure that benefits from rising rates.

While investors can use money market funds for their cash equivalents, we like the idea that this ETF replaces very short-term ETFs because you can preserve your capital better.

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