After more than a year of “will they/won’t they” coverage about interest rates and inflation, investors may be a bit fatigued. That hasn’t stopped markets from pricing in as many as “seven” rate cuts for the whole of 2024.
With economic data still not showing the signs of weakness that many believe would induce the Fed to cut, investors may feel stuck in the middle. That’s where an ETF like USFR, which offers current income without the volatility, can help.
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The WisdomTree Floating Rate Treasury Fund (USFR ), tracks the Bloomberg U.S. Treasury Floating Rate Bond Index. The strategy is rapidly approaching its tenth birthday, set for early February, a marker of its long track record. Charging just 15 basis points, the ETF invests in floating rate notes (FRNs), the most recent Treasury bill variant that sees its own rate fluctuate according to the most recent 90-day T-bill auction.
As such, they remain a very safe place for cash, with USFR offering solid 5.5% average yield to maturity as of January 18. The ETF has done well over the last year, returning 5.2%, per VettaFi data.
Waiting for Rate Cuts: The Case for USFR
Why look to USFR, then, amid the ongoing rate cuts prediction game? So long as uncertainty about the Fed’s actions abounds, the fund can provide a solid yield. Especially for investors who missed the boat on the duration trade given that cuts are still more likely than “hikes,” USFR can appeal. Investors still have a ton of cash parked in money market funds, for example, with USFR adding just a pinch more risk for some very appealing FRN opportunities.
Should the Fed actually not engage in the amount of rate cuts markets have been anticipating, FRNs tied to the actual fed funds rate could appeal. While two-, five-, and 10-year yields may be trying to reflect market gamesmanship about potential cuts, the three-month T-bill yield still offers steady returns. USFR’s ability to add current income without volatility could be one intriguing option while the rate cuts wait continues.
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