ETFs for a "Higher for Longer" Interest Rate Environment

WisdomTree Floating Rate Treasury Fund (

USFR

+0.02%

)

USFR is an ETF that I believe investors should strongly consider holding. The fund offers a rare combination of low interest rate risk, high yield, and excellent credit quality, making it an all-around great tool for cash and liquidity management.

USFR holds U.S. government floating rate notes, which are designed to fluctuate with short-term rates and are priced at a spread over 3-month Treasury Bills. This design inherently reduces interest rate risk, as the payouts adjust with rate changes, providing a more stable investment compared to fixed-rate securities in a rising rate environment.

For a modest 0.15% expense ratio, you can forgo the hassle of buying individual notes and instead get them in a neat, exchange-traded vehicle. This comes with the convenience of monthly distributions, making it an excellent choice for those looking to manage their liquidity effectively.

Currently, USFR offers a yield to maturity of 5.48%, which is a measure of total return considering all expected income payments and the capital gain or loss that will be realized if the bond is held to maturity. For those focused on pure income potential, you can expect a 5.33% 30-day SEC yield, which is quite attractive in today's market.

Finally, USFR stands out as one of the largest and most liquid floating rate ETFs available, featuring a 0.02% 30-day median bid-ask spread and managing over $17.5 billion in AUM.

JPMorgan Ultra-Short Income ETF (

JPST

+0.02%

)

If you're willing to move slightly down the credit rating spectrum to target higher yields, an actively managed fixed income ETF like JPST could be a suitable option.

Unlike some fixed income ETFs that follow a passive investment strategy, JPST is actively managed. This allows its portfolio management team the flexibility to manage credit and duration exposure on the fly, adapting to changing market conditions to optimize returns.

JPST primarily aims to maintain an average duration of less than a year. This strategic choice minimizes interest rate risk, which is particularly crucial in the current environment where rates are expected to remain higher for longer.

However, JPST doesn't limit its holdings to government treasuries; it also includes other credit instruments, which helps boost its expected returns. Currently, JPST offers a yield to maturity of 5.61% net and a 30-day SEC yield of 5.33%, making it an attractive option for those seeking higher income from their investments.

In addition to its strategy, JPST features the usual monthly distributions, which many investors find convenient for income planning. Notably, it charges just 0.18% in expense ratios, making it one of the most economical options among active fixed income ETFs available today.

Alpha Architect 1-3 Month Box ETF (

BOXX

+0.03%

)

Here's a short-term fixed income substitute that you might not have heard about: BOXX. This ETF is favored by advisors for its tax efficiency but remains less known among retail investors.

In essence, BOXX aims to deliver a total return similar to, or better than, 1–3-month Treasury Bills, but it does so without the usual interest income distributions.

How does it achieve this? Interestingly, BOXX doesn't actually hold Treasury bills. Instead, it employs an advanced multi-leg options strategy known as a box spread using European options. Simply put, a box spread is a combination of buying a bull call spread and a bear put spread.

This strategy is designed to exploit differences in option prices for profit, effectively simulating the returns of short-term Treasury bills with potentially more favorable tax treatment, as the returns are primarily derived from capital gains reflected in the ETF's share price rather than interest income.

Currently, investors can expect an average yield to options expiration of 5.78%, which serves as the metric to gauge total returns from this strategy. While BOXX has a higher expense ratio of 0.39% compared to other ETFs, this is to be expected given the complexity of the strategy it employs.

Despite the higher cost, BOXX has been popular recently, drawing in $513 million of inflows over the last month as of April 26, indicating a growing interest in alternative fixed income strategies that offer both return potential and tax efficiency.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.