Floating Rate Bond funds

For income-seeking investors, high-yield bond mutual-funds could be an attractive option. Such funds deal with corporate debt below investment-grade but these bonds are originated by banks rather than the companies themselves. So, it has less credit risk than junk bond funds but has more risk than a typical corporate investment-grade bond. The lien a bank has takes a higher priority in bankruptcy courts than a bond issued by a company itself. So in a bankruptcy, someone holding a corporate note might not get paid off, which does not happen in case of bank loans. These still shouldn't be confused with investment-grade quality bonds and investors should be cautioned that there can be losses due to defaults.

Floating-rate bond funds get their name from the fact that interest rates are reset every 30-90 days. The average interest-rate sensitivity of bank loan funds are about two-months long, which makes them comparable to short-term bond funds in terms of interest rate sensitivity.

Recently, yields on the 10-year Treasury shot through the 5% psychological barrier and last week touched five-year highs. The traditional bond funds are, no doubt, at risk for quite some time in future. On the other hand, bank rate loan funds seem to have placed themselves at a good position. If rates go down, then their income will go down but their NAV (Net Asset Value) won't be much negatively impacted. But, after all, these are bonds and so one shouldn't expect stock-like returns from this investment. Thus, fund expenses are a key to a good long-term success and should be seriously considered before taking the decision of investment.

The following funds could be considered by income-seeking investors. These can also be part of a well-balanced diversified portfolio:
Vanguard High-Yield Corporate Bond Fund (VWEHX) : Yield is around 7%, Expense ratio 0.26%.
Fidelity Floating Rate High Income Fund (FFRHX): Yield is around 6.4%, Expense ratio 0.74%.
Eaton Vance Floating Rate Fund (EVBLX): Yield is about 6.4%. Expense ratio 1.01%.