Why I Favor High Yield and Preferred Stocks

Among the many attributes that make ETFs superior to traditional mutual fund structures is the availability of information related to shares outstanding that is updated on a daily basis. Two asset classes which I favor currently are High Yield and Preferred Stocks. Both carry significant risk as we muddle through the recession. However, the steady increase in shares outstanding suggests net accumulation in these two downtrodden asset classes.

click to enlarge

The I-Shares Preferred Stock ETF (PFF) traded as high as 50 in early 2007 and now rests below 25. There seems to have been a modest growth in shares outstanding up until about the pinnacle of the credit crisis (October and November of 2008). Since that time the rate of growth of outstanding shares has spiked sharply, suggesting accumulation. My suspicion is there are some serious bets being made on recovery in this beaten down asset class.

The same type of accumulation appears to be happening in the shares of I-Shares IBoxx High Yield ETF (HYG). Notice the increased rate of growth for the shares outstanding this ETF experienced after its shares dropped from 100 in May to below 65 in late 2008.

Comments

[Roger Knights:]

Don't forget the even higher-yielding JNK!

Feb 13 06:39 AM

[Roger Knights:]

Don't forget the even higher-yielding JNK!

Feb 13 06:39 AM

[CreditTrader:]

Don't forget to hedge your Treasury risk! Given where we all know Treasuries are going, your willingness to buy JNK or HYG on valuation basis requires that you sell TLH or some such to benefit from the cheapness of spreads relative to real default risks. I have heard so much from the mainstream talking heads on buying bond ETFs and yet none of them undertand the difference between yield, spread, and real performance.

Feb 13 07:52 AM

[AndrewBaker:]

I like high yield and preferred stocks at the moment because I think the available yield in many cases is too high compared to the risk of default, which means that going forward there will be capital growth as well as income. Looking overseas also, you have many opportunities for sovereign and corporate high yielders, which if the currency is right can also give gain when the dollar falls. Using ETF makes it easy to buy and sell in and out when considered appropriate, and for short term trades, leveraged positions may be taken. Choose your own ticker, but don't ignore debt stocks in your portfolio.

Feb 13 09:27 AM

[claudio.lan...:]

Has anyone been watching what the government has done to destroy preferred financial stock. Everytime the government gives them money they take a huge position further diluting the shares. Further, doesn't any listen to Roubini, schiff, marc faber, gary schilling? if you have not then go to youtube and listen. The governments wants dividends to be reduced to 1 penny a share. If you listen to the fiasco hearings it was clear. Buy preferreds at your own peril.

Feb 13 11:01 AM

[shootpar2001:]

It is all about risk/reward.
With very little or no reward for many types of debt (Treasuries, MM, Cd's),
the movement out the risk chart is inevitable.
Of course due diligence is more important than ever.
I am finding a combination of ETF's and closed-end funds to be to my liking.
A slow gradual recovery of the economy is much more likely than a roaring
upturn. As more and more people, business' pay their bills first; owning the debt that they are paying off, could be the best investment of the year.

Disclosurers: PSY, PTY, PGF, ACG.

Feb 13 11:03 AM

[xrjx:]

On Feb 13 11:01 AM [e-mail] wrote:

> Has anyone been watching what the government has done to destroy
> preferred financial stock. Everytime the government gives them money
> they take a huge position further diluting the shares. Further, doesn't
> any listen to Roubini, schiff, marc faber, gary schilling? if you
> have not then go to youtube and listen. The governments wants dividends
> to be reduced to 1 penny a share. If you listen to the fiasco hearings
> it was clear. Buy preferreds at your own peril.

You're not considering that preferreds have been less affected; common shareholders have been crushed, but preferreds have not, and they are largely continuing to pay out. In many cases the preferreds are cumulative dividend-paying, such that even upon recovery, common shareholders won't get paid any dividends until the issuer makes good on all dividends that should have been paid to the preferred holders in past periods. When considering yields on pff have pushed past 11% in recent periods and the nature of the holdings, the yield makes up for a fair amount of that risk--I've still been getting paid at that yield, even while the share price has fluctuated. Seems reasonable to wait-I'll get the yield either through the dividend or capital appreciation or both.

Feb 13 02:13 PM

[richandmer:]

I know banks taking Tarps has language that requires them to decrease dividends to .01 in the future (under certain situations), but have not heard anything about requiring them to do the same with preferreds. Can you provide articles and links to back up your claim?


On Feb 13 11:01 AM [e-mail] wrote:

> Has anyone been watching what the government has done to destroy
> preferred financial stock. Everytime the government gives them money
> they take a huge position further diluting the shares. Further, doesn't
> any listen to Roubini, schiff, marc faber, gary schilling? if you
> have not then go to youtube and listen. The governments wants dividends
> to be reduced to 1 penny a share. If you listen to the fiasco hearings
> it was clear. Buy preferreds at your own peril.

Feb 13 03:54 PM

[ETFDesk dot...:]

I remember hearing from a pref'd manager (back in Nov '08) that 50% of the co's could go under and you'd still make money on the index (or his fund for that matter). However, while I don't see 50% of the co's going under, how long would we have to wait for the pref'd to be refinanced to get the cap gain...I do like PFF for the fact its holdings are a bit less financially focused than PGF
etfdesk.com/fundDetail...

Feb 13 04:00 PM