WisdomTree launches Europe’s first US Treasury FRN ETF

Mar 26th, 2019 | By | Category: Fixed Income

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WisdomTree has launched the WisdomTree USD Floating Rate Treasury Bond UCITS ETF – the first ETF in Europe to provide targeted exposure to Floating Rate Notes (FRNs) issued by the US government.

WisdomTree launches smart beta US multifactor ETF

Christopher Gannatti, WisdomTree head of research in Europe.

FRNs are debt securities whose coupon payments are reset periodically and pay a predetermined spread over a short-term interest rate.

This feature allows FRNs to be used as tools to reduce overall interest rate risk exposure within fixed income portfolios.

The US Treasury began offering FRNs for the first time in 2014.

According to WisdomTree, US FRNs can help bridge an important gap between short-maturity Treasury bills that do not offer coupon payments and longer-maturity, fixed-rate Treasury bonds.

Christopher Gannatti, WisdomTree Head of Research, commented, “For investors who are looking for another government bond instrument to replace some of the low-yield exposures present in many developed market treasuries, US Treasury FRNs could provide a yield enhancement, especially given the flatness of the US yield curve.”

Lidia Treiber, Fixed Income Research at WisdomTree, added, “US Treasury floating rate notes typically have a lower duration profile than floating rate corporate bonds (corporate FRNs) and can be used to help reduce corporate credit exposure within investor portfolios. Interest payments on corporate FRNs are exposed to corporate credit risk or risk that the borrower will default on its obligation.”

The ETF is linked to the Bloomberg Barclays US Treasury Floating Rate Bond Index which also underpins a similar US-listed ETF offered by WisdomTree that houses over $2.4 billion in assets under management.

The index includes FRNs, weighted by market value, with a maturity of less than two years.

The notes pay a quarterly coupon tied to the highest accepted discount rate of the most recent 13-week Treasury bill auction. The coupon of the note will update with each Monday auction of a 13-week Treasury bill, with the reset being effective the next day.

The ETF trades in US dollars and is available on London Stock Exchange in distributing or accumulating share classes under the tickers USFR LN and TFRN LN respectively. It comes with a total expense ratio (TER) of 0.15%.

While the fund is the first ETF in Europe to target the US Treasury FRN market, investors can already gain exposure to the USD corporate FRN market through ETFs offered by Invesco, BlackRock, UBS, or Lyxor. The cheapest of these are the Invesco USD Floating Rate Note UCITS ETF (UFLT LN) and Lyxor $ Floating Rate Note UCITS ETF (BUOY LN) with TERs of 0.10%.

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