The Best Way to Profit from Rising Interest Rates

Shah Gilani

We've looked at a couple of ways to protect our wealth from inflation in 2022 - it's got to be a top priority for investors right now. But protection is only half the equation - we want to capture profits along the way, too.

And so far, we've done a great job. Not so long ago, when I was the lone voice disagreeing with the common "inflation is just transitory" narrative, I helped set us up with some big winners.

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.

Now we're in an unprecedented situation - estimates show that the U.S. GDP may fall again in Q2, but the Fed is continuing its push to raise interest rates in an attempt to curb runaway inflation.

You read that right: they're raising rates into a shrinking economy.

It's a pretty shocking development, but there is a way to play it that can keep your portfolio growing if this trend continues: floating rate funds.

This asset class is one of the best ways to capitalize on rising interest rates and are about to have their proverbial moment in the sun. Here's what you need to know...

Why Fixed-Rate Investments Just Won't Cut It Right Now

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 (BATS: 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.

The bear market is still in full swing, and we're not at the end of the tunnel yet - the S&P is still down 17% for the year, representing a $2.3 trillion loss that's going to hit a lot of everyday folks in the wallet. Pensions, 401k's, IRAs - you name it - they're all taking massive hits.

But there are some moves investors can make right now that can "bully" down this bear market, if you know where to look. I've got a set of stock picks that are my version of fire insurance - the best cheap trades I can find right now with the best potential for safe returns.

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Shah Gilani

About the Author

Browse Shah's articles |

Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.

The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.

Shah founded a second hedge fund in 1999, which he ran until 2003.

Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.

Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.

Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.

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