INCLINE VILLAGE, Nev. — With interest rates at rock-bottom levels, these are difficult and frustrating times for savers. Still, for those willing to look “outside the box” there are vehicles that provide an attractive stream of income with acceptable risks. One asset class I've previously mentioned includes preferred stocks, which have done well. Yields are still around seven percent. I've mentioned utility stocks and emerging-market debt funds. They've done well, too, and are still attractive. There is a new asset class that I like.

Bank loan funds, also called floating rate funds, invest in loans made by banks to corporations, most of which are rated below investment grade. Because the loans “float,” their interest rate re-sets on average every few months. The rate is tied to the London Interbank Offered Rate (called LIBOR), which is added to the fixed amount of each loan set at origination. For that reason investors look at bank loan funds and other adjustable-rate securities as short-term vehicles that do not have the interest-rate risk of long-term bonds.

In a rising-rate environment bank loan funds can and will raise their monthly dividends. That, together with their attractive yields today, make them worth a closer look. What are the risks? There are two. First, nearly all the loans in the funds are below investment grade (read “junk bonds”). That means the ability of the borrower to pay is more closely tied to the economy than to the level of interest rates. They would not do well in a recession. Still, because the loans are senior and secured, recovery in the event of a default would be higher than with other loans.

The second risk comes from the use of leverage. The funds use some borrowed money to purchase additional loans. That's fine under normal conditions and enables the funds to pay more to investors, but they suffered during the financial crisis, as did virtually every investment. For that reason, these funds bear watching. They are not for buy-and-hold investors.

My favorite bank-loan fund is Eaton Vance Floating Rate Trust (NYSE symbol EFR), which currently yields 6.9 percent. Although I expect rates to remain low for quite some time, it's comforting to hold some securities that will benefit when rates begin to rise. After all, that day will come. It's not a matter of “if,” it's a matter of “when.”

— David Vomund is an Incline Village-based fee-only Registered Investment Adviser. Information is found at www.ETFportfolios.net or by calling 775-832-8555. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.