In a summer marked by investors fleeing to the safety of fixed income assets, the $1.7 billion WisdomTree Floating Rate Treasury Fund (USFR) has begun to bleed cash.
Over the past week, USFR was the rare bond fund losing money. Since Aug. 21, it has lost $837 million in investment assets, as investors reposition their portfolios for falling interest rates.
Source: ETF.com Fund Flows Tool; data as of Aug. 29, 2019
Floating Rate Treasuries Good For Rising Rates
Though investment dollars come and go, these are the first substantial outflows for USFR in its five-year history. And it’s no coincidence that they’re happening right now.
USFR tracks a basket of floating-rate Treasuries (FRNs). FRNs, which have a two-year maturity, have no fixed coupon rate; instead, they reset their coupon weekly, based on the most recent T-bill auction. They then make interest payments to bondholders quarterly.
As such, FRNs are largely disconnected from interest rate fluctuations, making them a safe place to park cash in times of rising rates.
But we aren’t in times of rising rates. Last month, the Fed lowered its benchmark interest rate for the first time in a decade, with more rate cuts widely expected at next month’s meeting (read: “$1.5B Flows Into 2 TIPS ETFs”).
When rates fall, USFR must reinvest the capital allocated to expiring FRNs into securities with lower yields. That means smaller interest payments, and less income for investors (read: “2 Views: How Low Can Rates Go?”).
USFR Falling, TFLO Steady
Though floating rate securities are more common in other corners of the bond market, such as senior loans, USFR isn’t the only floating rate Treasury ETF on the market. Its direct competitor, the iShares Treasury Floating Rate Bond ETF (TFLO), tracks an extremely similar portfolio. The two even launched on the same day.
TFLO has seen no outflows over the past week, however.
TFLO is much smaller than USFR; it has about a third the assets ($568 million), though its spread is tighter (0.02% to USFR’s 0.04%).
It has also slightly outperformed USFR year to date, rising 1.34% compared to USFR’s 1.29%.
Contact Lara Crigger at [email protected]
