I can’t count how many times in 2022 I’ve had subscribers ask me how to protect their wealth from inflation. It’s a great question, but I only think it’s half of the overall wealth creation equation.
Of course, we want to protect our wealth from inflation – but we also want to capture profits along the way to grow our wealth.
Speaking of inflation and profits….
I was a lone early voice disagreeing with the common narrative that inflation was merely “transitory”.
And I’m glad I was!
While most investors were still focused on tech stocks, I moved my paid subscribers into energy trades, and we captured numerous triple-digit winners on energy, long before it became the hot sector. And along the way, we even captured an 800% winner targeting something as boring as interest rates.
We’ll get things started with one of my favorite ways to play the trend: floating rate funds.
As the name suggests, a floating rate fund is a fund that invests in bonds and debt instruments whose interest payments fluctuate with interest rate levels.
In comparison, traditional fixed-rate investments provide fixed, predictable income, which might meet your objective goal in a non-rising-rate environment. But when interest rates are rising like they are now, fixed-rate investments lag behind the market because (as the name suggests) their returns remain fixed.
There is no one size fits all criteria to develop and manage a floating rate fund. The fund managers may choose to invest in preferred stock, corporate bonds, corporate loans, mortgages, and loans that have maturities from one month to five years. Floating rate loans are typically considered senior debt, which means they have a higher claim on a company’s assets in the event of default. Just to be clear, the term “senior” doesn’t represent an endorsement of credit quality. It merely indicates where in the pecking order (so to speak) the debt holder has a claim against a company’s assets if the company defaulted.
Income paid from a floating rate fund’s underlying investments is paid to shareholders through regular income and/or capital gains distributions paid monthly, but they can also be paid quarterly, semi-annually, or annually.
My favorite floating rate investment is The iShares Floating Rate Bond ETF (FLOT), which is an exchange-traded fund that seeks results that correspond to both the price and yield performance of the Barclays Capital US Floating Rate Note [less than] 5 Years Index.
FLOT gives investors access to more than 300 shorter-term investment grade bonds in a single fund, including holdings or notes from Goldman Sachs Group, Inc., Inter-American Development Bank, and Morgan Stanley.
More than 84% of the bonds in FLOT’s portfolio have credit ratings of A, AA, or AAA. I like that because it significantly lowers individual default risks.
And, more the 62% of the holdings have durations of 2 years or less. That’s important because shorter-term debt is less volatile.
Remember, FLOT will only benefit from rising interest rates. So it’s a fantastic way to benefit from the Fed’s strategy to curb inflation.
Make sure to check back in next Monday and the following Mondays as well, as I take some time to draw your attention to our series on inflation-beating investment ideas.
If you like this series, have any suggestions or have anything you want me to cover, feel free to shoot my staff an email at firstname.lastname@example.org.