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iShares recently introduced a Floating Rate Note ETF (Factsheet, Prospectus) that mostly holds federal and provincial bonds that pay a variable coupon that is referenced to a specified market interest rate and adjusted regularly. iShares says that the rationale for owning floating-rate securities is to minimize losses in the bond portion of the portfolio in a rising interest rate environment. The ETF’s management fee is 0.20% and iShares will be waiving the management fees for an introductory period.
Traditional fixed income securities typically decrease in value when interest rates rise and increase in value when interest rates decrease. Floating-rate bonds, on the other hand, are less sensitive to interest rate fluctuations but the income stream from floating-rate securities will fluctuate based on prevailing interest rates. Currently, XFR sports an yield-to-maturity of 1.46% and the duration is just 0.13 years (duration is a measure of the sensitivity of a fixed-income security to interest rate changes). In other words, XFR offers cash like exposure.
Given XFR’s cash-like risk/return profile, it seems to me that investors have better options. High Interest savings accounts offered through discount brokers currently offer an yield of 1.25%, which is pretty much exactly the same as XFR’s yield of 1.46% less the management fee of 0.20%. However, unlike an ETF, the high interest savings accounts can be bought and sold without incurring a trading commission.