The three managers of Akre Focus Retail Class (AKRE) liken their investment process to a “thre...
A Fund to Capitalize on Rising Rates
03/27/2012 10:45 am EST
As rates begin to climb for the first time in years, here’s a great pick to take advantage, writes Mark Skousen of Forecasts & Strategies.
Something has happened in the bond market—rates have risen sharply across the board for the first time in years.
I think this is the beginning of a major sea change: rising rates as the economy recovers and the Fed’s extreme “easy money” policies finally kick in.
Eaton Vance Floating Rate Income Trust (EFT) has a lot going for it. EFT is a “prime rate” closed-ended fixed income fund managed by Eaton Vance Management in Boston.
The fund invests primarily in senior, secured floating rate corporate loans. As short-term interest rates rise, EFT will gradually increase its monthly income. Thus, this prime-rate fund operates just the opposite of a long-term bond fund like MUE.
When interest rates rise, traditional long-term bond funds decline in price; prime rate funds like EFT increase. Indeed, the Eaton Vance Floating Rate Income Trust has increased its monthly dividend since October—and I think that trend will continue. It currently pays 8.3 cents a month for a 6.4% annual yield.
However, it always declares a Christmas bonus. In late December, EFT paid an additional 12 cents per share. So, the current yield is expected to be 7.2% or higher this year.
Like all prime rate funds, EFT is leveraged to maximize yield. But it is selling at slightly below its net asset value of $15.66. And it has the lowest expense ratio in the industry of 1.2%.
There’s plenty of liquidity in this fund, but don’t chase it. If it jumps ahead way above its net asset value (NAV), wait a few days for it to come down to a reasonable price.
With rates rising, prime rate funds like EFT will enjoy generous dividends and capital gains, the best of both worlds.
Related Articles on FUNDS
Essent Group Ltd. (ESNT) is legally domiciled in Bermuda; its sole business is providing private mor...
My Top Pick for conservative investors for 2018 is Templeton Emerging Markets Income Fund (TEI), a c...
For many investors, memories of 2000, when the tech bubble burst, and 2008, when the entire world se...