Blackrock has launched a floating rate bond exchange traded fund, which is designed to protect investor portfolios against interest rate rises.
The iShares $ Floating Rate Bond Ucits ETF gives investor portfolios exposure to US dollar denominated floating rate bonds. These products offer coupons that adjust with interest rate changes, so they differ from traditional bonds that pay fixed coupons.
Bonds held in the underlying index of the fund are rated investment grade or higher and have a maturity of up to and including five years. The fund has a total expense ratio of 0.10 per cent.
In May Blackrock launched two fixed income exchange traded funds (ETFs) to provide investors with more choice in US bond exposures.
The iShares dollar intermediate credit bond Ucits ETF (ICBU) invests in a subset of US investment grade bonds, with maturity dates between one and 10 years.
The fund provides exposure to a broad array of investment grade corporate, sovereign, supranational, local authority and non-US agency bonds.
The fund offers income generation potential relative to US treasuries with similar maturities.
The iShares dollar Tips 0-5 Ucits ETF (TIP5) invests in short-term Treasury inflation-protected securities and aims to provide an inflation hedge with lower interest rate risk, while offering growth potential.
The bonds included in the underlying index have a duration ranging between zero and five years and are US dollar denominated.
Brett Pybus, head of iShares EMEA fixed income strategy at BlackRock, commented: “Concerns about rising rates have prompted many investors to consider moving out of longer-duration bonds, this fund provides investors with a way to reduce duration and protect portfolios against periods of rising interest rates.
“The fund provides investors with exposure to short dated, high quality floating rate credit denominated in US dollars and offers an attractive yield compared with money market funds.”
Adrian Lowcock, head of investing at Architas, said: “Our view is that inflation has probably peaked, which will reduce pressure on interest rates in the short term. The UK economy is ticking over, and I can’t see a great problem on the horizon this side of Brexit.
"As such, I’d say these type of bonds are a useful tool, but due to the underlying complexities to consider, including the wider economic and political climate, probably better suited to experienced investors.”
Verdict: ETFs are a useful diversification vehicle but remain one for experienced investors, particularly as uncertainty continues around inflation.