TFLO: As Descriptive As It Gets For Floating Rate Treasuries

seekingalpha05-13

iShares Treasury Floating Rate Bond ETF offers investors a way to preserve capital and maintain a steady income stream during rising interest rate cycles.TFLO primarily invests in U.S. Treasury bonds ...

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This feature made the iShares Treasury Floating Rate Bond ETF (NYSEARCA:TFLO) a go-to for investors looking to preserve capital and maintain a steady income stream during the last three years, as the Fed embarked on the fastest rising rate cycle in history. And while I suspect a fund like this can continue to do well, the appeal certainly isn't what it once was. TFLO is designed to track the investment results of an index composed of U.S. Treasury Floating Rate Bonds. With its inception in February 2014, TFLO provides investors with a transparent, cost-effective, and efficient means to access the floating rate Treasury bond market. The ETF primarily invests in U.S. Treasury bonds with variable interest rates, which are adjusted quarterly based on the discount rates of the most recent 13-week Treasury bill auctions. ETF Holdings This fund's name is as descriptive as it gets. TFLO's holdings are a concentrated mix of U.S. Treasury FRNs with varying maturities. The floating rate component of TFLO makes the effective duration essentially 0, meaning the fund's movement is unaffected by rates rising. ishares.com Sector Composition and Weightings Given its exclusive investment in U.S. Treasury securities, TFLO's sector composition is singularly focused on the government sector. This makes the ETF's performance directly influenced by the fiscal and monetary policies affecting U.S. government debt, as well as the broader economic health of the United States, and, of course, Fed policy. Peer Comparison Unlike ETFs that invest in fixed-rate government or corporate bonds, TFLO is less susceptible to the negative price impacts of rising interest rates. However, it's important to note that in a declining rate environment, TFLO may underperform compared to its fixed-rate counterparts, as the income generated by the ETF would decrease with falling rates. To that end, it's worth comparing it to another floating rate bond fund, the WisdomTree Floating Rate Treasury Fund (USFR). The expense ratios are the same at 0.15%, and as we can see, the two funds have performed as you'd expect in line with each other when we look at a price ratio of the two to each other. stockcharts.com Pros and Cons of Investing in the Floating Rate Bond Theme Investing in TFLO and the broader theme of floating rate bonds offers several advantages. Firstly, the ETF provides a low-risk investment avenue into U.S. government bonds, backed by the full faith and credit of the U.S. government. Secondly, the floating rate mechanism offers protection against rising interest rates, making TFLO an attractive option for income-focused investors in an uncertain rate environment. Lastly, the ETF's focus on short-term securities enhances liquidity and reduces exposure to long-term interest rate risk. However, there are also drawbacks to consider. In periods of declining interest rates, TFLO's income potential is diminished, potentially making fixed-rate bonds more appealing. Additionally, the ETF's exclusive focus on U.S. Treasury securities limits diversification opportunities, particularly in terms of credit risk and sector exposure. As we can see from the yield chart, this follows rate cycles. That's the key. YCharts Conclusion  By focusing exclusively on U.S. Treasury floating rate notes, TFLO provides investors with a government-backed vehicle that adjusts to interest rate changes, offering a measure of protection in a rising rate environment. While the fund's performance in a declining rate scenario and its limited diversification pose considerations, TFLO remains a valuable tool for conservative investors seeking stable income and capital preservation. To that end, though, this is ultimately more of a macro call than anything else. If you believe the Fed is done hiking rates, then broadly speaking, you likely don't want exposure to float rate securities in general. Instead, you'd want to lock in the higher fixed rates before an easing cycle. On the (very real) possibility that the Fed isn't done hiking rates, then this remains a good fund to consider as a means to play that.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2435534552"}