This week will see both the broad and core personal consumption expenditures (PCE) indexes updating at the end of the week. It will be a large component in how the Fed responds with interest rate increases in the coming months. The WisdomTree Floating Rate Treasury Fund (USFR ), a fund that hedges for interest rate changes, has brought in nearly $2.1 billion in inflows in the last 30 days as advisors and investors pile into funds that can ride the tide of rising interest rates.
U.S. PCE will update on Friday for April. Last month’s report saw the overall PCE index grow 6.59% year-over-year and the core PCE index grow 5.18% year-over. PCE is a measurement of how people are spending money on goods and services while core PCE subtracts out energy and food-related prices.
The Fed relies heavily on the CPE when making decisions regarding inflation because it’s an accurate snapshot of what consumers are spending their money on and directly reflects changing consumer habits. While both CPI and CPE are taken into account, the Fed has stated before that it utilizes core CPE as its primary indicator of inflation and what it relies on most heavily when making decisions regarding interest rates, as detailed by Advisor Perspectives.
Federal Reserve Chair Jerome Powell has stated previously that 0.50% interest rate increases will be the case for June and July. Bond purchasing drop-offs are set to begin in June for the Fed as it starts the process of reducing its balance sheet.
Riding the Tide of Rising Rates with USFR
For advisors and investors looking for a fund that can potentially provide rate-hedging for portfolios, the WisdomTree Floating Rate Treasury Fund (USFR ) is a popular choice. Between April 20, 2022 to May 20, 2022, USFR brought in almost $2.1 billion in inflows.
The fund capitalizes on the use of floating rate notes by the U.S. Treasury and can be an excellent option for investors looking to limit their amount of credit risk but still capture higher yield potentials in rising rate environments.
WisdomTree believes that floating rate debt is an important bridge between long-maturity, fixed-rate Treasury Bonds and short-maturity Treasury bills. By investing in floating rate Treasuries, holders are paid out quarterly and the amount paid is based on a rate that resets daily in reference to a weekly rate. It can be a good option if Treasury bill yields are rising because it provides the opportunity for greater compensation over a fixed rate bond.
Another benefit to a floating rate is that price volatility can be somewhat lessened by the daily resets when compared to fixed income bonds. Treasury floating rate notes are a good option when the yield curve is flat or inverted.
USFR seeks to track the Bloomberg U.S. Treasury Floating Rate Bond Index, which measures the performance of floating rate notes of the U.S. Treasury and contains floating rate notes with two-year maturities and a minimum outstanding amount of $1 billion. The index uses a rules-based strategy and is weighted by market cap. The index excludes fixed-rate securities, Treasury inflation-protected securities, convertible bonds, and bonds with survivor put options.
USFR carries an expense ratio of 0.15%.
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