Investors concerned that interest rates may rise, devaluing traditional bonds, might consider these alternatives:
* Floating-rate funds, which invest in bank loans. If interest rates go up, banks can raise rates on loans to corporate borrowers, so floating rate funds have less interest-rate risk. These loans have default risk, which can be addressed by buying into a pool, and limited liquidity, because some floating-rate funds offer only periodic withdrawal windows.
Well-regarded floating-rate funds include Fidelity Floating Rate High Income and Eaton Vance Floating Rate.
* Adjustable-rate mortgage (ARM) funds Again, rising rates would increase yields while principal need not be depressed. Offerings include AMF Adjustable Rate Mortgage and Franklin Adjustable U.S. Government Securities.
Both types of funds are not tax-efficient so you should try to hold them in tax-deferred accounts, such as IRAs. If you’re in a high tax bracket, other fixed-income positions can be held through municipal bond funds, held in taxable accounts. Short-term muni funds such as USAA Tax Exempt Short-Term and Vanguard Limited-Term Tax-Exempt have minimal exposure to rising interest rates.
