Risks Related To Floating-Rate Investments
Floating-rate investments could be an effective way to diversify fixed-income portfolios in today’s low-yield environment. However, investors need to understand their risks.
Many floating-rate mutual funds utilize the single asset class strategy, investing almost exclusively in debt instruments such as bank loans. While bank loans can offer the benefit of low price sensitivity to interest rates, dominating a portfolio with a single asset class may introduce other risks to the portfolio. For example, the bank loans may be from a high-yield (“junk”) asset class, which generally carries a higher degree of credit risk than investment-grade corporate bonds.
A truly diversified approach would incorporate different asset classes offering varying degrees of protection against price volatility due to changing rates. Examples include high-yield corporate bonds, investment-grade corporate floating-rate bonds, asset-backed securities or even Treasury bills.
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