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Floating Rate Funds to Avoid Interest Rate Risk

The yield for these funds is now quite low. FLTR yields 0.57% and FLOT yields 0.38%. As low as that seems, it is competitive with short-dated, corporate, investment grade debt.

One important difference between the funds could be the expense ratios. The iShares fund has a straightforward 0.20% fee. FLTR has a fee that is capped at 0.19% until Sept. 1, when it could go up to 1.92%. Many Market Vector funds have a capped expense like this and the company has always extended them; it has never raised the fee on a fund before.

In that light it is reasonable to expect FLTR will be handled the same way but no guarantee. Obviously at current rates, allowing the fee to rise would take the yield to zero which would trigger an exodus from the fund.

For the last few years investors have chased yield with little to no consequence but the threat has always been there. The yields of these funds are low for now but if rates really are headed higher then protection will be more important than yield. At some point rates at all-time lows must normalize and if that is starting to happen now then these funds should offer that protection.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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