Preferred stocks, which despite their name have more in common with bonds, had a rough November.
The Trump effect--the post-election expectation of fiscal stimulus next year--has caused a massive rotation, raising prices of cyclical and financial stocks while depressing fixed-income.
The preferred portion of my portfolio took a beating, causing me to take another look at my holdings.
It has a four-star Morningstar rating and had been performing well for several years, with a five-year return of 8.6%. But it began weakening in September after interest rates bottomed over the summer, and then the wheels came off after the election, with the price falling 4.7% in November.
Here is a description of the fund:
The investment seeks investment results that generally correspond (before fees and expenses) to the price and yield of the Wells Fargo® Hybrid & Preferred Securities Financial Index. The fund generally will invest at least 90% of its total assets in preferred securities of financial institutions that comprise the underlying index. The underlying index is a market capitalization weighted index designed to track the performance of preferred securities traded in the U.S. market by financial institutions."
Expenses are a bit higher than other preferred ETFs, but not awful:
|Annual Fund Operating Expenses|
|(expenses that you pay each year as a percentage of the value |
of your investment)
|Total Annual Fund Operating Expenses||0.63%|
Source: PowerShares prospectus
I plugged PGF into a spreadsheet to see how an investment at last year's closing price looks compared to my largest holding, Wells Fargo (NYSE:WFC) series L convertible preferred, which I've written about several times. (Since WFC-L has gone ex-dividend, I included the payment on December 15 in the calculation.)
|PGF||1000 shares||WFC-L||20 shares|
Wow, look at that difference. Even though it got crushed in November (down 7.9%, WFC-L is still up 8.5% for the year on a total return basis, compared with just 0.9% for PGF. (WFC-L trades like a long-dated bond because the conversion feature is very unlikely to be triggered).
Why such a large difference? Several factors are involved.
- Even though as an ETF it has relatively low expenses, PGF's return is lowered by its expense ratio, 0.63%, which owning the individual security avoids.
- PGF's yield-on-cost for the year will wind up about 5.5% (adding all the dividends and dividing by the opening price). By the same measure, WFC-L yielded 6.3%.
- WFC-L has appreciated 1% during the year on a price-only basis despite the Trump tantrum, possibly as the result of more investors wanting a 6 percent yield with little call or credit risk. PGF has gone down 4.5% on a price-only basis. It now sells at a slight discount (0.17%) to its net asset value.
Source: Charles Schwab
Conclusion: I decided to sell my PGF, believing it's not a great value in a strong-dollar, rising-rate environment and I prefer to own individual investment-grade securities where the risk is largely confined to interest rates.
Disclosure: I am/we are long WFC-L.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.