Entering text into the input field will update the search result below

Weekly Fund Spotlight: Market-Beating Value In Preferred Stock CEFs

Mar. 08, 2018 2:40 AM ETDFP, FFC, FLC, FPF, HPF, HPI, HPS, SVC, JPC, JPI, JPS, JPT, LDP, PDT, PFD, PFF, PFO, PSF44 Comments


  • Preferred stock CEFs have had a tough 2018 so far.
  • Market-beating value can be found in preferred stock CEFs.
  • My top pick from the sector is FFC.


2018 has not been a good year for preferred stock CEFs so far. The removal of several preferred stock funds from the ISE High income Index [YLDA], tracked by YieldShares High Income ETF (YYY) and ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN (CEFL), sent prices reeling at the start of January (see "CEFL/YYY Rebalancing: Duds And Opportunities"). Last week, distribution cuts from Flaherty & Crumrine funds caused more prices to tumble (see "Weekly CEF Roundup: CEFs Rebound While Distribution Cuts Opening Opportunities").

Given this opportunity in preferred stock CEFs opening up, I wanted to take a Spotlight of this class of CEFs. The searchable tag for the Weekly Fund Spotlight is "fundan."

According to CEFConnect, there are 16 funds in the "preferred stock" category in the database. Basic details about the funds are shown in the table below. I also included the benchmark ETF, the iShares U.S. Preferred Stock ETF (PFF), in the last row of this table.

Ticker Fund
Yield Discount z-score AUM/$m Leverage Baseline expense Active expense
(DFP) Flah & Crum Dynamic Pref & Inc 7.32% -6.81% -3.6 499 32.52% 0.99% 0.28%
(FFC) Flah&Crum Pref Secs 7.43% -8.81% -4.4 890 32.81% 0.81% 0.14%
(FLC) Flah&Crum Tot Return 7.21% -8.41% -4.2 213 32.86% 1.22% 0.45%
(FPF) First Trust Inter Dur Pref & I 7.85% -6.82% -4.1 1511 30.28% 1.31% 0.54%
(HPF) JH Preferred Income II 8.35% -3.91% -3.5 448 33.83% 1.25% 0.46%
(HPS) JH Preferred Income III 8.18% -3.62% -2.6 555 33.42% 1.23% 0.45%
(HPI) JH Preferred Income 8.29% -5.51% -3.8 593 33.68% 1.24% 0.46%
(JPI) Nuveen Preferred & Income Term 7.93% -8.25% -2.9 1100 27.60% 1.25% 0.51%
(JPC) Nuveen Pref & Income Opps Fund 7.09% -7.43% -4.1 587 33.58% 1.21% 0.44%
(JPS) Nuveen Pref & Inc Securities 7.86%

Cambridge Income Laboratory: CEF and ETF Income and Arbitrage Strategies

If you have enjoyed my article, please click the "Follow" button next to my name to be alerted to my new free content! The Cambridge Income Laboratory is my Marketplace service on Seeking Alpha focused on income and arbitrage strategies for closed-end fund ((CEF)) and exchange-traded fund (ETF) portfolios. Members receive exclusive subscriber articles and an early look at public content with more actionable recommendations and ideas.

We’re currently offering a limited time only free trial for the Cambridge Income Laboratory. Prices are going up on March 9, 2018, so please join us and lock in a lower rate for life by clicking on the following link: Cambridge Income Laboratory.

This article was written by

Stanford Chemist profile picture

Stanford Chemist is a scientific researcher by training. For the past decade he has been providing analysis and evidence-based ways of generating profitable investments with CEFs and ETFs. He leads the investing group Learn more.

Analyst’s Disclosure: I am/we are long FFC, JPS. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

Comments (44)

FFC pricing recovered now. What is your current pick?
Another terrific article. Thank you! I just entered a position in PFS. I’ve traded into it 3-4 times over the last decade when the price gets beaten down. Not sure it’s at the lows for this cycle but think it’s close enough that the risk/reward is worth it. The 8% yield looks good and it’s about in the middle of the CEF group in terms of leverage.
03 Apr. 2018
Thanks for more useful insight.
IndyDoc1 profile picture
Nice review. Long FFC
Thanks for the article, SC.
The only things i miss here are comparison of duration and fixed/fixed-to-floating division which i think are critical in this environment. But otherwise, ton of useful info.
Stanford Chemist profile picture
Thank you Saz - very good suggestion for the future!
etfman profile picture
FPF has 86% in $1000 Par Preferred Stocks and 14% in $25 Par Preferred Stocks when you read their holdings at the First Trust site.
Stanford Chemist profile picture
Thanks for the info etfman - much appreciated! Sometimes CEFConnect has weird labels which is why I had to look up the annual reports for FPF - but I guess I should have just checked the website first ;-)
Oil Can profile picture
First, really appreciate the article on CEF's - preferred or otherwise.

Own several others in your list, but not FFC.

So the general idea is - the price is right, the dis has already been cut several times, the yield is good, what's not to like?

Some CEF's will not cut their distribution, no matter what (well almost). It's part of the "managed distribution policy". What's with the FFC cuts - i.e., are they using a different distribution policy than many other CEFs?

Stanford Chemist profile picture
Hi Oil Can, thank you and thanks for the question!

Most fixed income CEFs will have a managed distribution policy. When earnings go down they will either have to reduce their distributions to realign with earnings, or pay out more of the distributions from ROC/gains. The question as to "when" to cut and "how much" to cut will depend on management....
I wanted to buy one of the CEF preferred, but I am waitnig to see if the yield stablized.
The discount vs premium looks good. Thanks for the commentary Stanford Chemist.
NV_GARY profile picture
Very good info.
You might be correct about FPF, but I have to wonder- from their site as of 1/31/18:

Security Percent
Fixed-to-Floating Rate Securities 78.85%
Fixed Rate Securities 15.16%
Floating Rate Securities 5.99%

Makes it hard to suspect that there might be some more esoteric form of preferreds.
Stanford Chemist profile picture
Thanks for sharing Gary!
Ed Bickford, CPA profile picture
Good article! I own PSF and also 10 individual preferred issues. PSF is one of the 10 CEF's which I also own. In the recent downturn the individual Preferred's are down less than PSF, less then the other CEF's as well as the REIT's I own. I think the leverage in the Preferred CEF's causes them to decline more in a period of rising rates than holding individual preferred's so I'm not sure I would want to invest a Preferred CEF right now. What do you think?
Pacman13 profile picture
Mostly agree with you , I have seen essentially the same pattern but FPF and LDP have held up as good as some individual preferreds.
Stanford Chemist profile picture
Thanks for sharing Ed! Yes, you are correct that leverage will exacerbate movements in either direction - definitely something to keep in mind!
bmayfield profile picture
SC, still trying to due my due diligence, I am watching FFC closer, but the 3 cuts are a negative. Is there a way to extrapolate where the break even would be on total return given 3 cuts per year for the next three years? I assume your safety score from 1 - 10 for FFC might be greater than 5 ( you mentioned for JPS)?
Thank you for another great article and I'm in total agreement with your conclusions. I'm a long time holder of FFC and JPC and will continue to hold them. For those waiting for a better entry point perhaps consider buying a small position now and adding over time or any future weakness. Earned dividends can often equal or at least shrink any price difference one might gain by waiting. That's another nice feature of buying a high dividend paying instrument.
How do all these compare to SPFF? Would it be better because it has lower fees than a CEF? And pays the same?
NV_GARY profile picture
I was looking thru SPFF- can't find it right now, but it looks like their earnings coverage is ~50%. ROC varies, but their 8937 doc evens it out to each month being about 5%- the monthly 19As are quite a bit higher- but don't count at tax time,
Stanford Chemist profile picture
Hi dmhogan, thanks for the question. ETFs have lower fees than CEFs but you lose the features of active management, cheap leverage and the ability to take advantage of premium/discounts. All of these can be "double-edged" swords so it does come down to your personal preference and investor profile as well
bmayfield profile picture

Great article. I thought you might have included UNII in the comparison. FFC has .0213 which only covers 18% of the distribution. You must have some gut feeling they might not reduce the distribution for awhile? Two others with better UNII are PDT (59%) and FPF (60%). But I suppose there is a possibility any of these CEFs could cut their distribution as you said.
Stanford Chemist profile picture
Hi bmayfield, thanks for the comment! As you can see from the article I used % coverage rather then UNII. Both UNII and coverage will be lagging metrics, but I prefer coverage because it's easier to visualize - telling us whether the earnings are covering the distribution or not regardless of the UNII bank. Moreover some funds with positive UNII cut, and others with negative UNII don't cut, so it's not very useful as a short term timing tool IMO. Finally, I'm actually quite agnostic on dividend cuts -- theoretically a lower dividend is made up with better NAV returns going forward!
bmayfield profile picture
It is probably right in front of me but I do not see the coverage # on any of the cef connect tabs.
Stanford Chemist profile picture
bmayfield, I take the earnings number from CEFConnect and divide by the per share distribution. You can also go to CEFdata where they do the coverage for you (e.g. http://bit.ly/2DdDF9L).
Oh, and thank you for the article SC. I already have a couple of preferred CEFs but FFC looks interesting.
Might be lack of experience on my part but given that we have an economy that could be overheating, full employment, rising inflation (possibly exacerbated by trade wars), possibility of wages rising (ie teacher's contract), the Fed saying 3 more increases this year, the 10 year yield creeping up, etc. - that there might be a even better entry point coming up for preferreds in a few months? Just curious what others might think. I may sit tight and look for better opportunities.
Stanford Chemist profile picture
HI alphebettr, thanks for sharing your insight!
Pablo profile picture
Typical. FFC is one of the few I don't own. Will check it out!
Thanks for this extensive report. Just an FYI and since I own JPS I was curious when I noticed your 1-year Z-score at -5.1, cefconnect and cefdata has it as -1.90.
Stanford Chemist profile picture
Hi jradwan, thanks for the comment! This article was first released to members of Cambridge Income Laboratory 1 month ago (as noted in the article) so the data may have changed since then.
I think your reports for non-subscribers are useful even though they are delayed, but I wish that before each data table you would list the "as of" date, so that the vintage would be clear to readers.
Stanford Chemist profile picture
Hi Vivek, thanks for the great suggestion!
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!
To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.