Here are three noncommodity CEFs to protect your portfolio from inflation.
How can investors earn a reasonable rate of return, without putting the initial capital invested too much at risk? It's no secret that banks are offering record low interest rates on checking accounts, savings deposits, money market accounts, and certificates of deposit. Also, many investors are wary of locking in low rates for years if, as many market pundits believe, interest rates are set to rise. With the growing fear of upcoming rampant inflation, investors seeking a place to park cash for a short period of time find themselves in the midst of an investing conundrum.
One solution may be closed-end funds, or CEFs, that invest in short-term and inflation-protected government securities. To be sure, any investment can lose value. But the strategy of such CEFs includes capital protection; they aren't going to take big bets in the hope of capturing huge gains.
Both short-term bonds and inflation-protected investments have advantages. Although current rates are low, they can't fall below zero (on an absolute basis). This is the crux of the argument for many who believe that rising interest rates are inevitable. If this is true, short-term bonds have an advantage over longer-term (although typically higher-yielding) bonds: Because they mature more quickly, their prices are less sensitive to interest-rate movements. Investors in such bonds are not locked in long-term at currently low market rates.
During the last three years, many investors flocked to gold-related investments to protect against inflation (there are three CEFs investing in gold: Central Fund of Canada
TIPS pay interest twice a year at a fixed rate based on the bond's principal amount, which adjusts for inflation (based on the movements of the Consumer Price Index, or CPI). If the CPI rises, the bond's principal amount increases, which creates higher semiannual payments. At maturity, bondholders are paid the higher of the original or adjusted principal amount.
There are six CEFs that invest primarily in government securities, though not all of them have large TIPS exposure. Most of these CEFs strive for income generation and capital preservation, though this is not foolproof: Witness the example of Federated Enhanced Treasury Income
Of these five CEFs, three are heavily invested in TIPS or other inflation-protected securities, making them suitable for investors seeking protection against inflation and rising interest rates. Investors may want to consider holding these investments in a tax-deferred account.
Western Asset/Claymore Inflation-Linked Opportunity & Income
Western Asset Inflation Management