Here’s Why Inflation Is Spiking (and How You Can Profit)

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If you’re worried inflation will sideswipe your portfolio, well, you have good reason to be.

Because make no mistake, rising prices will be the story of 2018. And if you want to protect your portfolio, you need to act now. I’ll show you how a little further on.

First, let’s go toe to toe with the inflation boogeyman, and see what kind of punch we can expect him to pack this year.

A Growing Threat

Starting late last year, the consumer price index (CPI) jumped, and the increase is accelerating as we start 2018.

Prices Heat Up

Of course, that’s probably not news to you; it’s been covered daily in the media.…
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Exchange-traded funds (ETFs) shattered growth records in 2017, with inflows topping $464 billion last year. The global ETF market now boasts more than $4.5 trillion in assets, and a large part of the appeal has been driven by dirt-cheap fees.

But many of these fund’s fees are “cheap for a reason.” We’ll talk about five today that lure investors in with appealing current yields – but then proceed to dump their dumb money out the back door.

These five funds may have sweet dividend yields, but they have produced sour total return results thanks to one fundamental flaw or another.

ETRACS Linked to the Wells Fargo Business Development Company Index ETN (BDCS)
Dividend Yield: 8.7%

One of the most basic appeals of the exchange-traded fund is the cheap diversification they provide.…
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It’s one of the biggest worries I hear from investors who hold bonds: what’s going to happen to my portfolio when the Federal Reserve raises interest rates?

My short answer is always the same: don’t worry—it’s not as big of a deal as you think.

That’s true for many bond funds out there—but there are some that are still ticking time bombs because they’re poorly managed. The worst offenders are the ones that aren’t managed at all—the “dumb” funds that blindly track the index and keep a ton of bonds from near-bankrupt companies alongside much better issues.

Funds like the iShares iBoxx High Yield Corporate Bond ETF (JNK) and the SPDR Bloomberg Barclays High Yield Bond ETF (HYG) are the worst offenders here.…
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I’ve been getting a lot of emails from readers worried about how closed-end funds (CEFs)—especially bond-oriented closed-end funds—will perform next year, when the Federal Reserve raises interest rates.

And that’s definitely a when and not an if—there is too much good economic data to suggest the Fed will back off its rate-hike plans, which both it and most US legislators desperately want to happen.

(A couple weeks ago, I gave you my outlook for the US economy in 2018 and named 5 non-bond CEFs to buy before the New Year arrives. Click here to read that article.)

The conventional wisdom on rates and bonds is simple: rising rates are bad for bonds.…
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As income investors react to the new tax plan, it’s a good bet that some are overreacting to certain aspects of it. They always do.

There’s confusion between high yielding fixed income, and pure junk. There’s also a flood of tax-advantaged paper about to hit the market, creating bargains for smart buyers.

The result? Yields up to 10%, with some price upside to boot!

Bargain #1: “Smart” High-Yield Bond Funds for 7.5%+

If you hold high-yield (often called junk) bonds, you may have noticed they’ve sold off as the Republicans’ tax talk became serious. They’ve taken down other assets, too – some for good reason, some not.…
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Most investors with $500,000 in their portfolios think they don’t have enough money to retire on.

They do – they just need to do two things with their “buy and hope” portfolios to turn them into $3,279 monthly income streams (or much more):

  1. Sell everything – including the 2%, 3% and even 4% payers that simply don’t yield enough to matter. And,
  2. Buy my 8 favorite monthly dividend payers.

The result? $3,279.69 in monthly income every month (from an average 7.6% annual yield, paid every 30 days). With upside on your initial $500,000 to boot!

And this strategy isn’t capped at $500,000.…
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It’s one of the first questions readers usually ask me:

“Don’t closed-end funds’ high dividend yields make them dangerous?”

It’s a good question, with CEFs offering yields of 8% or more. It’s also a general (but far from certain, as I’ll explain shortly) rule that higher yields bring a higher risk of a dividend cut.

Take Frontier Communications (FTR), a stock my colleague Brett Owens sounded the alarm on in April.

The telecom provider was yielding a whopping 16% before it slashed its dividend in June 2017. The stock plunged when the cut was announced:

Slashed Dividend, Slashed Share Price

FTR is yielding a whopping 20% now, thanks to its collapse in price (because you calculate yield by dividing the annual dividend rate into the current share price).…
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Junk bonds can be a great source of retirement income, or a terrible idea altogether. It depends what you buy, and really, which managers and vehicles you entrust to find value in the bargain bin.

There’s a right way to do it, and a wrong way. Let’s start with the latter, led by the popular iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and SPDR Barclays High Yield Bond ETF (JNK) – the two largest junk bond exchange-traded funds (ETFs), and both top-10 fixed-income ETFs by assets under management.

You and I can do better than these dumb ETFs. They are popular thanks to their low fees.…
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Fee-obsessed investors continue to pile into exchange-traded funds (ETFs).

Don’t follow them.

Because there’s another—much less popular—group of funds that will hand you much better returns (and double the dividend payouts). And swapping your ETFs for them is easy.

I’m talking about closed-end funds (CEFs). (If you’re not familiar with CEFs, click here to check out a primer I recently wrote on them.)

Now even though I just said CEFs are less popular than ETFs, that doesn’t mean they’re totally ignored. The truth is, they’re getting more attention from investors of late, for reasons I’ll dive into in just a moment.…
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It’s a whopper many investors believe—you may even be one of them.

It’s simply this: all fees are evil.

After all, the more you shell out to line fund managers’ pockets, the worse your return will be, right?

It sounds right. It makes sense. But it’s totally wrong, particularly when it comes to the world of high-yield closed-end funds, which I’ll get to in a moment.

Truth is, you don’t have to go further than the darlings of “cheap” investing—exchange-traded funds—to see how bogus the so-called “wisdom” on fees is. Check out this chart showing the seven-year performance of two nearly identical ETFs—the Vanguard S&P 500 ETF (VOO) and the SPDR S&P 500 ETF (SPY), and keep in mind that VOO has always had lower fees than SPY:

The Cheap Fund Is … the Loser?
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About Author

Brett

Hi, I’m Brett Owens – and I’m a financial junkie. My “problem” started incollege, when I got a little dose of the stock market – man, was I hooked…in no time, I was reading the Wall Street Journal religously.

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