iShares Treasury Floating Rate Bond ETF

TFLO

Market cap $6.6B

iShares Treasury Floating Rate Bond ETF offers a low-volatility, near-zero duration tool for parking liquidity with fast-adjusting coupon income. TFLO's dividend closely tracks short-term rate changes, adjusting rapidly in response to Federal Reserve moves, with little lag from overnight rates. Currently, the 3M-SOFR spread is near zero, meaning TFLO's net yield over cash is minimal after fees, limiting its appeal for extra return.

The iShares Treasury Floating Rate Bond ETF (TFLO) offers exposure to US Treasury FRNs, providing low credit risk and automatic coupon adjustments with interest rate changes. TFLO is best used as a hedge against rising rates or as a 'cash plus' alternative, but current macro conditions do not favor new purchases. Imminent interest rate cuts and stable credit spreads reduce the fund's attractiveness, as future returns are likely to decline with lower SOFR rates.

The main positive in the inflation battle is that the oil price has come down, but the record inflation expectations might already include expectations of a lower oil price. Inflation expectations but also meaningful economic concerns going off industrial and consumer indicators also means credit spreads may remain elevated. Both put duration bets at risk. TFLO avoids duration and credit risk, which may make it an appropriate pick right now for fixed income ETF investors.

TFLO invests in floating rate treasury notes, securities broadly comparable to T-bills. Credit risk and interest rate risk are both almost zero, share prices stable. Despite potential Fed rate cuts, TFLO's stable performance and good yield make it a compelling investment option for low-risk portfolios.

These ETF strategies may safeguard your portfolio amid rising treasury yields.

Over the past 3 years, TFLO has outperformed many popular ETFs with minimal price risk, making it a reliable income investment. I prefer TFLO due to its floating rate US Treasury notes with 1-3 year maturities, offering stability and above-average yields. With a dearth of attractive stock opportunities, my portfolio now holds nearly 40% in T-bill ETFs, cash, and TFLO entering 2025.

The Federal Reserve has cut rates by roughly 100 bps in 2024, pushing down yields across the front end of the curve and leading investors to explore riskier alternatives. Floating Rate Notes, or FRNs, are short-term, low-risk treasury instruments with weekly rate resets tied to the 13-week T-bill rate. The iShares TFLO ETF exclusively holds FRNs, offering a zero-duration profile. Unlike funds employing complex risk strategies, TFLO consistently provides a stable yield (4.69% 30-day SEC) with virtually no volatility, even during market stress.

Long-term U.S. treasury yields have been on the uptrend lately. Benchmark U.S. Treasury yields were 4.26% on Nov. 5, up from 3.74% recorded on Oct.1.

An upbeat job market and moderately cooling inflation may prevent the Fed from opting for significant rate cuts in the near future.

The iShares Treasury Floating Rate Bond ETF may face lower yields as inflation pressures ease due to China's economic slowdown and oil price declines. TFLO has no credit risk and follows prevailing Fed funds rates. Still, there are roadblocks to inflation that could mean rate cut expectations implied by markets are optimistic.