Expectations for further U.S. rate hikes in 2019 have crumbled recently. However, we believe there are still reasons to consider investment grade corporate floating rate notes (FRNs) in a portfolio.

First, a pause in rate hikes, along with economic growth and low inflation, is generally positive for credit. FRNs of corporate issuers may outperform those issued by sovereigns or agencies in this environment.

Second, although further hikes are not currently expected, some investors may want to hedge against an upside surprise. FRNs can help lower duration without giving up yield.

Lastly, FRNs may diversify a bond portfolio, as illustrated by low or negative correlation to most fixed income sectors.

MVIS US Investment Grade Floating Rate Index (MVFLTR)

Source: MV Index Solutions.

About the Author:

William Sokol joined VanEck in 2016 as a product manager for VanEck Vectors ETFs, focusing on the firm’s international fixed income products. Prior to joining VanEck, Mr. Sokol held various product development roles at Prudential Financial, and was a derivatives structurer at BNP Paribas. Mr. Sokol holds a B.S. in Finance from New York University and is a CFA and CAIA charterholder.

The article above is an opinion of the author and does not necessarily reflect the opinion of MV Index Solutions or its affiliates.