Floating Rate Funds in Australia: 2025 Guide & Outlook

With the Reserve Bank of Australia (RBA) holding cash rates at multi-year highs and inflation proving stubborn in 2025, investors are rethinking their fixed income strategies. Floating rate funds—once considered a niche product—are now at the centre of smart portfolio discussions. But what exactly are floating rate funds, and why are they suddenly in such high demand?

What Are Floating Rate Funds and How Do They Work?

Floating rate funds are investment vehicles that primarily hold debt securities with variable interest rates. Unlike traditional fixed-rate bonds, the interest paid on these assets adjusts periodically, often in line with benchmarks like the RBA cash rate or the Bank Bill Swap Rate (BBSW). This means their yields rise when benchmark rates go up, protecting investors from the price drops that typically hit fixed-rate bonds during periods of tightening monetary policy.

Key features of floating rate funds include:

• Interest rate protection: As rates rise, so do the yields on the underlying securities, making these funds less sensitive to rate hikes.
• Diversification: Floating rate funds can invest in a mix of corporate loans, asset-backed securities, and government-related debt.
• Liquidity: Many Australian floating rate funds offer daily liquidity, letting investors move quickly as markets shift.

Why Floating Rate Funds Matter in 2025

After years of ultra-low rates, the RBA’s aggressive tightening cycle in 2023–2024 has left the cash rate at 4.35% in early 2025, with most economists predicting it will stay elevated for much of the year. This environment has made traditional fixed-rate bonds less attractive, as their prices fall when rates rise. In contrast, floating rate funds have seen strong inflows as investors look for yield without the same level of interest rate risk.

Recent Australian financial data shows:

• Net inflows into floating rate funds surged by over 20% in the first quarter of 2025, outpacing both equity and fixed-rate bond funds.
• Major superannuation funds, such as AustralianSuper and Hostplus, have increased their allocation to floating rate credit in response to the new rate landscape.
• Retail investors are using floating rate funds as a tactical allocation to complement term deposits and high-interest savings accounts, which are also benefiting from higher rates but lack the same growth potential.

In short, floating rate funds offer a rare sweet spot: the chance to earn higher income as rates climb, without locking in today’s yields for the long haul.

Risks, Rewards, and What to Watch For

No investment is risk-free, and floating rate funds are no exception. Here’s what to keep in mind:

• Credit risk: Many floating rate securities are corporate loans or lower-rated bonds, so defaults can impact returns—especially if the economic outlook worsens.
• Liquidity risk: In volatile markets, some underlying assets may be harder to sell, potentially delaying withdrawals.
• Fee structures: Active management can boost performance, but higher fees can eat into returns. Compare management expense ratios (MERs) before committing.
• Yield versus risk trade-off: While floating rate funds offer attractive yields, they may not match the safety of government bonds or insured bank deposits.

Example: The Betashares Australian Bank Senior Floating Rate Bond ETF (ASX: QPON) has delivered strong performance in 2024–2025, with its yield rising in lockstep with the RBA’s moves. However, like all ETFs and managed funds, it remains exposed to the creditworthiness of underlying issuers.

How to Add Floating Rate Funds to Your Portfolio

Ready to take advantage of floating rate funds in 2025? Here’s a practical roadmap:

1. Assess your risk profile: Are you comfortable with some credit risk in exchange for higher yield?
2. Compare fund options: Consider ETFs for low-cost, broad exposure or actively managed funds for more targeted credit selection.
3. Mix with other income assets: Floating rate funds work best as part of a diversified income strategy, alongside cash, term deposits, and government bonds.
4. Monitor the macro environment: Keep an eye on RBA policy and corporate credit trends, as both can impact fund performance.

Whether you’re a seasoned income investor or just seeking to protect your portfolio from rate hikes, floating rate funds deserve a closer look as we navigate the complex Australian financial landscape in 2025.