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How to Pick a Floating Rate Bond Fund

David Waring

In the world of bond investing, there are two superstars: Bill Gross of PIMCO and Jeffrey Gundlach of DoubleLine. Of late, Gundlach has been getting more of the spotlight with his on-target market predictions, ranging from the fall of Apple's stock price to the rise of Japan's Nikkei stock market index.

On June 4th, Gundlach announced his firm will be opening its floating rate fund to the public. With fewer than 10 funds in DoubleLine's fund lineup, the announcement indicates that they believe this asset class represents an opportunity for investors.

What makes floating rate debt interesting?

--Yields on floating rate debt are high. Many floating rate funds currently pay an SEC yield of between 5 and 6 percent.

--As interest rates rise, the owner of floating rate debt gets paid more buy the borrower.

--Unlike bonds that pay a fixed interest rate, bank loans don't lose much value when interest rates rise.

--In the cases where the borrower defaults, floating rate debt holders generally do better than bondholders.

The Downside

--Floating rate funds buy the debt of non-investment grade companies. If the economy does poorly, there is a chance for a large number of defaults.

--At current market prices, there is very limited room for prices to rise.The chance to make money from price appreciation on floating rate debt is almost non-existent.

Which funds should you invest in?

We think the world of DoubleLine. Their Floating Rate Fund, which will be open to investment on July 1st, has no load and a reasonable annual expense ratio. However, the fund has not been around for long and has no rating from Morningstar. If you're more comfortable investing in a floating rate fund with an established track record, the DWS Floating Rate Fund is our top pick. The fund is rated 4 stars by Learn Bonds and has a total return of 8.12 percent over the last year and 6.07 percent over the last five. There is no load and a 0.96 percent annual expense ratio.

David Waring is co-founder of bond education website Learn Bonds. If you've watched a YouTube video on technical analysis or forex trading, you have probably seen one of the over 100 videos that he produced. His trading education videos have been streamed over 6 million times and counting.

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