The law of interest rates is really the opposite of the law of gravity: What goes down must eventually come up.

On the interest rate front, the US Federal Reserve is grappling with how much longer to continue providing stimulus to the US economy, as revealed in the minutes of the January 2013 meeting of its Federal Open Market Committee (FOMC). With the Fed continuing to purchase $85 billion worth of assets each month, more Fed officials are concerned about the long-term costs and risks this is creating.

The scope of the debate has also widened. Should the purchases be made at varying rates? Should the Fed confirm it won’t sell any of the assets it has bought anytime soon? This type of questioning has reached such a high pitch that the FOMC is planning to debate these issues at its next meeting.

While bond yields haven’t really budged as a result of such concerns, equity markets swooned in the trading sessions that followed the release of the FOMC minutes, given the uncertainty created.

It’s not at all clear the Fed will have the courage to continue its asset purchases and keep interests rates near zero until unemployment drops to 6.5 percent, particularly given stronger economic data.

As a result, many investors are looking for ways to insulate themselves against rising interest rates.

Floating-rate loans (FRL) are an excellent tool for doing just that.

FRLs typically have much lower durations—otherwise known as interest- rate sensitivity. That’s because their coupons reset at fixed intervals relative to a benchmark interest rate, most often the three-month London Interbank Offer Rate (LIBOR).

So as interest rates rise—LIBOR tends to run higher than the Fed funds rate—the coupons paid by the loans keep pace, albeit with a slight lag.

Because of that reset feature, the loans generally trade pretty close to their par value and exhibit relatively low volatility, barring a credit freeze like that of 2008-09. FLRs can also plunge in value if interest rates fall, but there isn’t much risk of this, since rates are functionally at zero percent right now.

Short & Flexible

The iShares Floating Rate Note (NYSE: FLOT) exchange-traded fund (ETF) is a good way to hedge your portfolio against interest- rate risk, since it provides exposure to 262 individual FRLs.

The FRLs of this fund are extremely short-term, with more than a third maturing in less than a year. Only 0.25 percent of the holdings mature in more than five years. And more than 99 percent of the fund’s FRLs have investment-grade credit ratings, while Standard & Poor’s gives the fund an overall A-rating.

Note that FLOT’s portfolio is not entirely free from credit risk, since FRLs come after bonds in the capital structure. But in case of default, their claims would be settled prior to those of equity investors.

The fund’s monthly distributions aren’t astronomical at the moment, with a yield of just 0.95 percent. But this rate will rise along with prevailing interest rates.

On top of that, FLOT is one of the least expensive FRL funds, with an annual expense ratio of just 0.20 percent.

While interest rates might not move for some time yet to come, FLOT is relatively cheap insurance against the day they do finally start to rise.