Though rising rate concerns have been playing foul in the global stock market since the start of the year, the worries have deepened in recent weeks. This is because a raft of solid economic data, including robust May job reports, solid retail sales data and modest inflation, have raised speculations of a sooner-than-expected (as early as September) first rate hike in more than six years.

The economy added 280,000 jobs in May, far above the market expectation of 225,000. Though unemployment ticked up to 5.5% from 5.4% in April, average hourly wages rose 8 cents to $24.96, bringing the year-over-year increase to 2.3% – the highest growth in nearly two years. Retail sales also jumped 1.2% in May after rising 0.2% in April and housing market is also fast gaining traction after the first-quarter slump (read: Upbeat Data Fuels Optimism in Housing Stocks and ETFs).

In anticipation of this, interest rates have been moving up in the past few weeks. Yields on the 10-year Treasury (TNX) bonds hit 2.478% on Wednesday, the highest level since September 30, 2014. Bond investors have already lost a lot of money in the past few weeks and this trend may continue for some more time.

However, there is still one corner of the bond space – floating rate securities market – that looks to offer a hedge against rising interest rates and provides safe income to investors with lower downside risk.

Why Floating Rate Notes?

Floating rate notes are investment grade bonds that do not pay a fixed rate to investors but have variable coupon rates that are often tied to an underlying index (such as LIBOR) plus a variable spread depending on the credit risk of the issuers.

Since the coupons of these bonds are adjusted periodically, these are less sensitive to an increase in rates compared to traditional bonds. Unlike fixed coupon bonds, these do not lose value when the rates go up, making the notes ideal for protecting investors against capital erosion in a rising rate environment.

Investors currently have four floating rate notes ETF in the market, any of which could make for a compelling choice. All these funds focus on corporate notes and offer higher yields than other short duration instruments (see: all Investment Grade Corporate Bond ETFs here).

iShares Floating Rate Note ETF (FLOT - ETF report)

This is the most popular fund in the floating rate securities market space that follows the Barclays US Floating Rate Note < 5 Years Index. Holding 431 securities, the fund has an average life of 1.84 years and effective duration of 0.15 years. The product has amassed over $3.0 billion in its asset base while trades in volume of 680,000 shares per day on average. Expense ratio came in at 0.20%. The fund has added 0.45% so far this year and has a dividend yield of 0.47% (read: 3 ETFs to Watch on Rising Rates).
 

SPDR Barclays Investment Grade Floating Rate ETF (FLRN - ETF report)

This ETF tracks the Barclays U.S. Dollar Floating Rate Note < 5 Years Index with average maturity of 1.81 years and modified duration of 0.13 years. It holds 434 securities and has been able to accumulate $385.1 million in its total asset base. The fund charges 15 bps in annual fees while volume is moderate at under 44,000 shares. It has gained 0.6% in the year-to-date timeframe and has a dividend yield of 0.56%.

Market Vectors Investment Grade Floating Rate ETF (FLTR - ETF report)

This fund tracks the Market Vectors Investment Grade Floating Rate Bond. Holding 171 securities, it has a comparatively higher average life of 2.64 years while modified duration is 0.13 years. The product has been overlooked by investors as depicted by its AUM of $97.2 million and average daily volume of 29,000 shares. Expense ratio came in at 0.14%. FLTR has delivered flat returns so far in the year and yields 0.64% in annual divided.

AdvisorShares Pacific Asset Enhanced Floating Rate ETF ((FLRT - ETF report))

Investors seeking for an active approach could find FLRT an exciting pick. The fund seeks to offers investors a focused portfolio comprising income producing floating rate loans and floating rate debt securities, which aim to provide a high level of current income (read: Inside AdvisorShares' New Floating Rate Corporate Bond ETF).

The ETF has newly debuted in the space, and has gathered $27.5 million in its asset base within just four months. However, it is a high cost choice, charging 1.10% in fees per year. Its trading volume is too low at around 12,000 shares.