It’s the question that has beguiled markets throughout 2023 – when will the rate hikes end? After another pause from the Fed for November, it seemed like the agency may have been satisfied. New signals from at least one Fed governor, however, suggest that the central bank may be retaining the right for further action. While Chair Jerome Powell had also indicated it wouldn’t hesitate to raise again, it may have initially passed as an effort to maintain market fear of rates.
Now, however, those risks seem more substantial. In a year in which fixed income has returned to play a big role in portfolios, understanding the rate hike situation matters. Investors, especially looking ahead to 2024, may want to look to an ETF that can not only adapt to rate hikes, but even benefit. That strategy, the (USFR ), which will hit its tenth anniversary of operation next year, may merit a look.
What exactly does USFR do? The ETF, which holds more than $18 billion in AUM, tracks the Bloomberg U.S. Treasury Floating Rate Bond Index. In doing so, it looks to invest in “floating rate notes,” or FRNs, a type of Treasury product introduced in 2014. USFR invests in FRNs with a two-year term, looking to benefit from their interest-rate sensitivity as FRNs reset their coupon rate weekly based on the most recent 90-day auction results.
The Rate Hikes Response in USFR
Not only does that mean USFR makes for a solid long-term investment regardless of the rate landscape, but the fund can even benefit from short-term hikes. USFR has returned 4.6% YTD, and for a 15 basis point fee, it offers a 5.4% 30-day SEC yield. For investors looking to bolster their fixed income holdings amid a nebulous future rate hikes situation, consider USFR.
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