Floating Interest Rate Funds: 101

What are Floating Interest Rate Funds?

Floating interest rate funds, also known as floating rate funds, are a type of mutual fund or exchange-traded fund (ETF) that invests in debt securities with variable interest rates. These interest rates typically fluctuate based on a benchmark interest rate, such as the LIBOR or the Secured Overnight Financing Rate (SOFR).

How do Floating Interest Rate Funds Work?

Floating interest rate funds work by investing in a portfolio of debt securities, such as bonds and loans. These securities typically have interest rates that are tied to a benchmark interest rate. As the benchmark interest rate fluctuates, the interest rates on the securities in the fund's portfolio will also fluctuate.

Why Invest in Floating Interest Rate Funds?

Investors may choose to invest in floating interest rate funds for several reasons:

• To hedge against rising interest rates: Floating interest rate funds can help investors protect their portfolios from the effects of rising interest rates. As interest rates rise, the value of fixed-income investments typically declines. However, floating interest rate funds can benefit from rising interest rates because the interest rates on the fund's portfolio will also rise.
• To enhance yield: Floating interest rate funds can offer higher yields than traditional fixed-income investments, such as bonds and CDs. This is because the interest rates on the fund's portfolio can fluctuate based on market conditions.
• To diversify a portfolio: Floating interest rate funds can help investors diversify their portfolios by providing exposure to a different asset class.

Floating Interest Rate Funds: Considerations

Before investing in floating interest rate funds, investors should consider the following:

• Interest rate risk: Floating interest rate funds are subject to interest rate risk. This means that the value of the fund's portfolio can decline if interest rates rise.
• Credit risk: Floating interest rate funds invest in debt securities, which are subject to credit risk. This means that the fund's portfolio could lose value if the issuer of a security defaults on its debt obligations.
• Expense ratio: Floating interest rate funds have expense ratios that can vary. These ratios can eat into the fund's returns over time.

Floating Interest Rate Funds: Examples

There are a number of floating interest rate funds available to investors. Some examples include:

• Vanguard Floating Rate Bond Index Fund (VFLTX)
• iShares Floating Rate Bond ETF (FLOT)
• SPDR Bloomberg 1-3 Month T-Bill ETF (BIL)

Floating Interest Rate Funds: Tips and Tricks

Here are some tips and tricks for investing in floating interest rate funds:

• Consider your investment objectives: Before investing in a floating interest rate fund, consider your investment objectives. Floating interest rate funds can be a good option for investors who are looking to hedge against rising interest rates or who are looking to diversify their portfolios.
• Do your research: There are a number of different floating interest rate funds available. Before investing in a fund, do your research to see which fund is the right fit for you.
• Consider the expense ratio: As mentioned earlier, floating interest rate funds have expense ratios that can vary. These ratios can eat into the fund's returns over time.
• Monitor your investment: Once you have invested in a floating interest rate fund, monitor your investment regularly. This will help you make sure that the fund is performing as expected.

FAQs About Floating Interest Rate Funds

Here are some FAQs about floating interest rate funds:

• What are floating interest rate funds? Floating interest rate funds invest in debt securities with variable interest rates.
• How do floating interest rate funds work? Floating interest rate funds invest in a portfolio of debt securities, such as bonds and loans. These securities typically have interest rates that are tied to a benchmark interest rate.
• Why invest in floating interest rate funds? Investors may choose to invest in floating interest rate funds to hedge against rising interest rates, to enhance yield, or to diversify a portfolio.
• What are the risks of investing in floating interest rate funds? Floating interest rate funds are subject to interest rate risk and credit risk.
• How do I choose a floating interest rate fund? Before investing in a floating interest rate fund, consider your investment objectives and do your research.
• How do I monitor my investment in a floating interest rate fund? Once you have invested in a floating interest rate fund, monitor your investment regularly to make sure that the fund is performing as expected.

Conclusion

Floating interest rate funds can be a valuable addition to an investment portfolio. These funds can help investors hedge against rising interest rates, enhance yield, and diversify a portfolio. However, it is important to understand the risks associated with floating interest rate funds before investing.