Summary
- The iShares Treasury Floating Rate Bond ETF is a fund that falls in the cash parking vehicles sub-category.
- TFLO is a rare instrument because it aggregates Treasury Floating Rate Notes, an often unknown corner of the Treasury market.
- An FRN is a Treasury security that has an interest payment that changes over time - as interest rates rise, the security's interest payments will increase.
- FRNs are all AAA, and have a de-minimis duration profile.
- TFLO is very much akin to a money market fund, with 0.39 standard deviation in price and a yield that adjusts with the front end of the Treasury curve.
Thesis
The iShares Treasury Floating Rate Bond ETF ( TFLO ) is an ETF that falls in the cash parking vehicles sub-category. TFLO is a rare instrument because it aggregates Treasury Floating Rate Notes, an often unknown corner of the Treasury market:
Introduced in 2013, Floating Rate Notes are the first new Treasury marketable securities since the Treasury Inflation-Protected Security in 1997. An FRN is a security that has an interest payment that can change over time. As interest rates rise, the security's interest payments will increase. Similarly, as interest rates fall, the security's interest payments will decrease. Treasury FRNs are indexed to the most recent 13-week Treasury bill auction High Rate prior to the lockout period, which is the highest accepted discount rate in a Treasury bill auction.
Source: Treasury Direct
Treasuries are known as fixed rate instruments, and most of the funds out there that hold treasuries have to worry about duration and impact of interest rates. The lowest duration ETFs that aggregate Treasuries are usually the ones that invest in T-Bills.
And then there are the Floating Rate Notes (or FRNs). FRNs are typically issued with a maturity of two years or less, and are considered to be low-risk investments, as they are backed by the full faith and credit of the U.S. government. We can see why FRNs are ideal in a rising rates environment by looking at TFLO's duration metrics:
The fund does not run any duration basically. Even though the underlying collateral has a weighted average maturity of 1 year, given the floating rate nature of the assets, the duration is inexistent. We can see the same characteristics in the below 'Analytics' section, where we see how the 3-year fund standard deviation is just 0.39. That is sub 1%! What does that mean? Let us look at the price graph for this name:
Over the past decade the fund's price graph looks like a straight line - it has moved between $50 and $50.52 per share. That is basically a max 1% move. Think of TFLO as a money market fund at the end of the day, because that is what this fund does - its price barely moves while disbursing prevailing market interest rates.
Analytics
- AUM: $4.7 billion.
- Sharpe Ratio: -1.17 (3Y).
- Std. Deviation: 0.39 (3Y).
- Yield: 4.6% (30-day SEC Yield)
- Premium/Discount to NAV: n/a.
- Z-Stat: n/a.
- Leverage Ratio: 0%
Holdings
The fund contains eight floating rate notes and cash:
All of the underlying collateral is floating rate, meaning it will keep re-setting higher as rates increase. Because these are Treasuries, they are all AAA and government guaranteed.
Performance
We can see how Treasury cash parking vehicles did in the past year below:
This is a nice graph because what it does is differentiate duration - the only fund here that runs some duration is SHY. And we can see how that got punished with a negative total return. The rest of the cohort is composed of either Floating Rate Notes or T-Bills, hence the nice upwards sloping total return line. We can see how TFLO is the outperformer here, even though the numbers are fairly small on an absolute basis.
Conclusion
TFLO is an exchange traded fund that falls in the cash parking vehicles category. What is unique about TFLO is its collateral - namely Treasury Floating Rate Notes (or FRNs). FRNs are Treasury securities with a floating rate, indexed to the most recent 13-week Treasury bill auction. As the front end of the curve moves up, FRN yields increase. This feature produces a low sensitivity to interest rates, with TFLO having a 0.01 years duration. The low duration profile plus the 0.39 standard deviation in the fund's price make it very much akin to a money market fund - TFLO has an extremely stable price (i.e. an investor can buy and sell virtually at the same levels) and passes to investors a dividend yield extracted from the front end of the Treasury yield curve. In today's environment where we expect another leg down in this bear market, having a very high balance in an instrument like TFLO and getting yields close to 5% is an ideal way to wait out the storm.
For further details see:
TFLO: Rare 4.6% Floating Rate Treasury Yield