HoldingsFloating-rate bonds from corporations including Goldman Sachs, CitiGroup, AT&T, and NBCUniversal
Managed byBlackRock Fund Advisors
The Federal Reserve has been increasing interest rates for the past few years–since 2017, interest rates have risen four times. And while that’s not necessarily a great thing for the stock market, it can be an opportunity to buy bonds.
Bonds are complex. Generally speaking, they are a form of debt issued by a company or a government, and in exchange for that debt you get a regular interest payment.
The problem with conventional bonds is that when interest rates rise, the coupon paids by existing bonds stays where they are. That can cause the price of those bonds to fall, and with it the yield.
But this isn’t the case for something called a floating interest rate bond. When interest rates go up, the return on floating rate bonds should also increase. Unlike conventional bonds, the price of the bonds doesn’t fall. In other words, the yield goes up with interest rates.
Rate Hike Refuge lets you invest in floating rate bonds.
What’s in the Rate Hike Refuge fund?
Rate Hike Refuge is Stash’s name for the iShares Floating Rate Bond ETF (FLOT). The fund tracks the Bloomberg Barclays US Floating Rate Note < 5 Years Index.
The fund holds 638 investment grade corporate bonds, as of March 28, 2018.
The bonds mature in less than five years. That’s in contrast to Treasury bonds which generally have maturities between 10 and 30 years. With a shorter time to maturity, the bonds have less interest rate exposure, and hence less potential risk.
While the majority (56%) are issued by U.S. banks and financial institutions, about a quarter of the bonds (26%) were issued from the industrial sector, and a further 11% from so called supranational entities, which are organizations formed by two or more countries working together.
In addition to big name Wall Street banks including Goldman Sachs, Morgan Stanley, and CitiGroup, you’ll find bonds from Apple, AT&T, and NBCUniversal, among others.
Fund performance and other details
The fund, managed by BlackRock, launched in 2011.
The fund’s return is 0.52%, as of March 26, 2018, according to Morningstar. Rate Hike Refuge’s biggest best year so far was 2012 with an annual return of 4.3%. Since then, its return has ranged from 0.08% in 2014 to 1.65% in 2017.
Similar funds — those with floating interest rates — are delivering investors similar performance. A comparable fund, the Vanguard Short-Term Corporate Bond ETF (ticker: VCSH) tracks the Bloomberg Barclays U.S. 1-5 Year Corporate Bond Index, and it comprises bonds issued by industrial, utility, and financial companies, with maturities between one and five years.
Though its performance has mostly aligned with Rate Hike Refuge’s over the past few years, the fund has returned -0.88% year-to-date, according to Morningstar.
Risks and considerations
It’s always a good idea to diversify your investment portfolio, and Rate Hike Refuge can help shield part of your holdings from rising interest rates.
But there are always risks. In contrast to U.S. Treasuries, which carry very little risk since they are backed by the federal government, you’ll be investing in the debt of companies, which can have operational issues. Also, if interest rates fall, the rate paid on these bonds will also go down, which may not make them the best bet in such an environment.
The fund’s prospectus also points to “financials sectors risk” as an area of exposure, because a large portion of its assets are bonds issued by financial institutions.
Rate Risk Refuge has an expense ratio of 0.2%, which is lower than the average ETF expense ratio, according to industry data.
- Rate Hike Refuge is a floating rate bond fund
- While bond rates are typically fixed, this ETF has a floating rate
- This fund offers protection from the volatility of stocks and changing interest rates