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  • Replace Bonds With Preferred Stock Mutual Funds 0 comments
    Mar 5, 2013 4:53 AM

    The current market forces leave little or no room for a healthy interest rate scenario and what is worsening is that the rates are unlikely to improve in near future, yet investors yearn to bear fruitful portfolios that will sustain them through this rough patch. One popular trend to satiate this need is dividend re - investing and adding equity vehicles that indulge in regular pay outs, commonly exercised by adding exposure to high yield equity and other market traded products that focus on top preferential equity from around the world. An index attuned Preferred Securities ETF precisely caters to the low yield issue and its past performance will give you a fair idea on where to look when seeking regular monthly income products for your dear portfolio.

    The S&P Enhanced Yield North American Preference Stock Index is a collection of about fifty most liquid and greatly yielding American and Canadian ideal stocks. The benchmark ensures that no one security must dominate the collection. According to the Standard and Poor's the above index has beaten the S&P United States Preferred stock index by about 200 basis points in the past couple of years.

    Preferred stocks are an exclusive asset class that is known for its greater proprietorship on the company's assets than the ownership held by the common stocks and also another enticing feature is the superior yields they bestow on the investors along with wealth appreciation. These shareholders are given dividends before the common stock holders and the payout frequency is also higher although both holders enjoy the same tax advantage.

    Investors have more than one option in this arena. One is entering the favoured stocks of individual companies and second is purchasing Equity traded funds of these desired stocks. The ETF route offers diversification at a reasonable cost. And most have a great contact with the financial sector as banks have been actively handing out such shares due to the tax and capital benefits.

    One of the few good to know points is that Preference shares have either no maturity or are long term say with an expiration of 50 years or so.

    A characteristic `call feature'is associated with this asset class and interested individuals must be acquainted with;the normauthenticates the company promoters to buy back theshares or convert it into a common stock. This usually pushes down the market prices as share owners tend to sell out their holdings before the redemption process begins.

    The securities could face a credit risk as the issuers may fail to meet the dues and rights of its investors.

    These securities are similar to bonds in a way that with rising interest rates their prices tend to fall. This opposing relation turns to be another risk one needs to watch out.

    Contrary to the bonds issued by the company where pay-out is a mandatory feature, a majority vote of the company board can with hold the dividends that will in turn directly affect the yield of preferred stock mutual fund.

    The North American Index has an impressive stock line up that includes Wells Fargo Cap, Credit Suisse, HSBC Holdings and Wall Street majors like JP Morgan and Chase Bank and the past six month returns are more than satisfactory but due to its recent inception last year, there is unavailability of enough historical data thus a standardised yield for the asset is yet to be derived by the analysts.

    Although questions like whether the big boys of the North American financial world can collectively divert the investor attention from the conventional bonds towards Preferential Securities ETF and beat the bond market returns may have more clarity post the second quarter of the current year but their uniform asset spectrum will surely go a long way in achieving that.

    Global X Super Income Fund [SPFF] has been proved as high yield preferred ETF and preferred securities ETF; it has delivered as per the performance of the North American Enhanced Yield Index. With 42 securities SPFF ETF has more than $ 15 Million of Assets under Management [AUM] and the issuers charge an annual expense at 0.58%. Credit Suisse PFD, American International Group PFD and HSBC Holdings PLC PFD are the top three assets and come with an assured yield between 7%-9%.

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