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A Fund to Capitalize on Rising Rates

03/27/2012 10:45 am EST

Focus: FUNDS

Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

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.

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