These ETFs Win the Inflation War

03/25/2013 8:30 am EST

Focus: ETFs

Bryan Perry

Editor, Cash Machine, Premium Income, Quick Income Trader, Instant Income Trader

Not even the Fed can control the bond market or main street inflation, but there is a strategy sensitive to rising inflation that investors can profit from, says Bryan Perry.

My guest today is Bryan Perry and we’re talking about the coming inflation scenario. Hi Bryan, and thanks for joining me.

Thanks Nancy, it’s great to be here.

Tell me, what’s going on with inflation? We haven’t had much, but are you expecting to see some hit sometime pretty soon?

Yeah, the government doesn’t report much inflation. I saw a recent chart that showed about 2.1% inflation for 2012 with a few bumps in the road, and that’s co-inflation. But household inflation by every measure, and everyone you just about talk to, it’s still up there, whether it’s energy or utilities or college tuitions or medical care...

Yeah, I haven’t seen anything going down.

Going to the grocery store—I don’t see any of that going down. Taking your dog to go get a haircut. The vet bills—my gosh, any of that stuff, it’s still ratcheting higher.

And so the Fed, with the recent numbers that came out here, they’re committed to a zero interest rate policy, or a quarter of 1% on the short-term rates for throughout 2015 now. They’ve extended out this policy directive. With that in mind, the bond market still is going to be—and they’re committed to keeping rates tamped down to try to generate employment to 6.5%. We’re still up around 8%, so that formula is still going to be out there quantitative easing forever.

We don’t know how it’s going to end, but in the meantime, what we can do is be in those types of investments where you are starting to see the yield curve move on the ten-, the 20-, and the 30-year bond. They’ve moved up almost 50 basis points since the middle of November—as big as the Fed is, they still can’t control a bond market that’s approaching $100 trillion around the world

You can see money rotating out of the long end and into equities, explaining the 5% pop in January, and some of that is justified and some of it’s just momentum. But what we want to do is—knowing that inflation is out there, knowing that taxes are going to go up on us across the board, especially for those that are doing well—we want to be able to have not just a hedge against monetary inflation, against a weak dollar, higher interest rates, but also household inflation and also against higher taxes.

That’s all inflationary, and there are ways to structure portfolios that allow us to be in instruments that are sensitive to that.

Can you give me an example of that?

Sure, like let’s take floating-rate corporate bond funds. There are two I recommend there. One’s the Nuveen Floating Rate Bond Fund (JRO), which has a current yield of 7.2%.

Well, that’s healthy.

Oh yeah, and it pays monthly. It’s made up of senior loans and senior mortgages put out by corporations, and they were all adjustable rate, so it’s a nice way for bond investors that are just committed to staying in bonds, because that’s where they’re comfortable.

It’s a good time to start not just planting those seeds, but starting to till that garden and getting into some of these floating-rate bond funds, and as they’re rotating out, they don’t have to go into dividend-paying stocks. They can just go into a floating-rate bond fund.

They can get in for a fairly modest amount of money, right?

Well, these are closed-end funds. Just buy them for whatever your commission is.

Yeah, so easy.

They’re short-term. They typically have a duration of only three to four years in terms of the maturities—so you’re not out there taking all this yield risk on the long end of the curve—and they’re diversified. Some are between 200 and 300 different issues in these funds. Nuveen’s a terrific family of funds for fixed income, but this is adjustable-rate income.

The other one I like is the Franklin Templeton Limited Duration Fund (FTF), which pays around 6.25%. Same thing; it’s senior loans, senior paper, mortgage notes against existing businesses, buildings, inventories, that’s all adjustable rate.

With that in mind...and again, it pays monthly, so it gives the bond investor a really nice yield, and they’re not subject to what’s going to happen if the yields pop on me. You’re going to watch your income go up.

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