Paul Dykewicz is leading financial journalist and editor for StockInvestor.com. He recently met with...
Contrarian Income Eyes Floating Rate ETFs
07/20/2018 5:00 am EST
BlackRock Floating Rate Income Strategies Fund (FRA) and Eaton Vance Floating Rate Income Fund (EFT) tend to deliver their promised distributions and price upside when rates rise, explains Brett Owens, dividend expert and editor of The Contrarian Income Report.
These funds barely blink when stocks plummet, and they even hold steady when rates plummet. Their secret? They buy corporate bonds. These issues have higher yields and more flexibility than, say, U.S Treasuries. As rates move higher, these money managers aren’t left with has-been pieces of paper.
BlackRock Floating Rate Income Strategies Fund is currently on sale for no good reason. The fund is a closed-end fund (CEF), a vehicle which can be prone to price whipsaws. These are opportunities we level-headed contrarians can take advantage of.
The fund’s “discount window” — the difference between the value of the bonds it holds, and the price it commands on the open market — has expanded to 5.5%.
BlackRock Floating Rate Income Strategies Fund traded at a premium to its NAV as recently as 2013. If rates keep rising and this fund swings back into favor, we’ll enjoy this “free money” window closing as price upside. We pay 94.5 cents for a dollar, plus we get the yield!
Meanwhile, Eaton Vance Floating Rate Income Fund portfolio manager Scott Page is able to cycle into higher paying investments as rates move higher. His loans, on average, reset every 48 days. Thanks to a portfolio that features 90% floating rate loans.
When the bonds mature, Scott will simply roll the capital into new corporate bonds. He can search the public and private markets for deals (showing another advantage of bonds over stocks – the universe is larger). And if interest rates are higher when he looks, he’ll capture the higher yield.
But Scott doesn’t have to wait for maturity. Remember, his loans reset every seven weeks, on average. He isn’t stranded if rates spike. He simply rides the rate wave to higher payments. He doesn’t get drowned in its wake – as other lesser managers do.
Since the Fed started (slowly) hiking rates in 2015, BlackRock Floating Rate Income Strategies Fund and Eaton Vance Floating Rate Income Fund investors have enjoyed these “Fed funded” higher returns.
It’s a simple formula — during rate hike periods, you want to own these funds because they steadily grind higher. Buy the Eaton Vance Floating Rate up to $15.30 and the BlackRock Floating Rate Income Strategies Fund up to $14.75.
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