WisdomTree Floating Rate Treasury Fund (USFR) Celebrates 10-Year Anniversary on NYSE ARCA

High credit quality, low interest rate risk

Unlike most bond ETFs, USFR specializes in holding a unique kind of Treasury security known as floating-rate notes, or FRNs.

These securities are designed to adjust their interest rates in line with short-term rates, specifically priced at a spread over 3-month Treasury Bills. Their rate fluctuates based on the outcomes of the weekly 3-month Treasury Bill auctions, making them responsive to changes in the broader interest rate environment.

The significance of USFR's structure became particularly evident following the bond bear market of 2022 when interest rates surged.

With short-term rates now exceeding 5%, USFR is positioned advantageously because its holdings in FRNs mean its payouts increase as short-term rates rise. This contrasts sharply with fixed-rate bond ETFs, which typically suffer losses when rates climb.

For example, in 2022, while traditional bond ETFs like the iShares U.S. Aggregate Bond ETF (

) faced a 13% loss due to rising rates, USFR managed a return of 1.98%. Since its inception in 2015, USFR has outperformed AGG with significantly less volatility, mainly by mitigating the adverse effects of rate sensitivity.

As of April 2, USFR is offering a yield to maturity of 5.49% with an exceptionally low duration of 0.02 years. This essentially means that investors in USFR can enjoy relatively high yields while being exposed to minimal interest rate risk, a balance that is hard to achieve in today's market.

Additionally, USFR provides monthly distributions, allowing investors to receive consistent income at a low expense ratio of 0.15%. For DIY retail investors and advisors alike, this setup offers a more accessible and economical alternative to individually rolling over FRNs.

How USFR fits into a portfolio

I envision multiple ways that USFR can be incorporated into an investment portfolio.

Firstly, USFR can serve as a highly liquid and secure alternative to traditional cash management tools like money market funds, T-bill ETFs, and brokerage cash sweeps.

The securities within USFR are issued by the federal government, ensuring very high credit ratings and minimal risk of default.

Additionally, the ETF aligns closely with prevailing interest rates, adjusting as they change, which makes it an attractive option for investors looking to manage their cash while still earning a competitive yield.

Its high liquidity is evidenced by a very narrow 0.02% 30-day median bid-ask spread, making it easy for investors to enter and exit positions without significant cost.

The second application for USFR is as a substitute for traditional aggregate bond ETFs within the fixed-income portion of a risk-averse investor's portfolio.

Unlike many bond ETFs that include corporate bonds or bonds with intermediate to long durations, USFR focuses exclusively on floating-rate Treasuries.

This approach significantly reduces the ETF's exposure to both credit risk and interest rate fluctuations, making it a solid choice for investors seeking stability in their fixed-income investments.

Finally, USFR stands out as an effective, affordable, and accessible hedge against a scenario where interest rates remain higher for an extended period.

Despite initial expectations at the start of 2024 for four rate cuts later in the year, revised forecasts now anticipate only two cuts due to a cautious Federal Reserve, a hot economy, and an uptick in inflation.

In such an environment, an ETF like USFR provides an inexpensive and convenient means to protect a portfolio against unexpected shifts in monetary policy and their potential impact on the markets.

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