Weekly Review: Preferred Stock CEFs

Includes: FPF, JPC, JPS, PDT, PFF
by: Arbitrage Trader

Review of how preferred funds finished the week.

Comparison of closed-end funds in the group.

Recap of news related to them, if any.


Over the last few months, most of you have noticed our increased activity in closed-end funds as the inflow of volatility finally shook them up and created various arbitrage, and directional, opportunities for active traders such as us. Now that these products have our attention, we are continuously monitoring most funds by sector and will reinstate our Weekly Review, publishing a recap of the groups of interest.

The News

Source: Yahoo News, Preferred Stock Closed-End Funds News

There was no news over the past week.

The Benchmark

Our leading benchmark of the preferred stock sector (PFF) has reached a new high this week. On Friday, the ETF hit a price of $37.77 per share, which is $0.06 above its previous high. However, PFF closed the week a little bit lower, at a price of $37.71 per share.

Source: Barchart.com - PFF Daily Chart (6 month)

The chart looks great with these green bars and stable uptrend since the fund bottomed in the middle of May. The fact that PFF pays dividend on Monday may be the main reason for the rally on the last day of the week. Nevertheless, PFF sends a powerful message to the fixed-income investors with its performance over the last month and a half.

The start of the week was promising for the 20+ Year Treasury Bond ETF (TLT), especially when we notice the big gap at the middle of the week. Despite the fact that on Monday TLT will distribute dividend to its shareholders, the ETF closed the day at its lowest.

Source: Barchart.com - TLT Daily Chart (6 month)

All that said, let's proceed with the CEFs invested in these products and see if we can find something worth our attention.

1. Sorted By Z-Score:

Source: cefconnect.com

We use the Z-score to find statistically undervalued or overpriced funds in the sector. If the value of Z-score is negative, it signals a "Buy" opportunity. Reversely, if you are looking for a "Sell" candidate, you should be interested in a positive Z-score value.

We can observe vast shifts in the chart today. At first sight I can notice two "Buy" candidates. My first pick will be the Nuveen Preferred & Income Securities Fund (JPS). It is statistically undervalued with a negative Z-score of -2.00. In addition to its negative evaluation, the CEF is also trading at a wide discount of -8.93%. The second closed-end fund that I want to stop your attention at is again from the Nuveen family. The Nuveen Preferred & Income Opportunities Fund (JPC) is evaluated from the market as underpriced and we can find support for these words in the Z-score, which is -1.90. The fund is trading at a big discount as well.

Our leader of the group today is the Cohen & Steers Ltd. Duration Preferred & Income Fund (LDP). It has a positive Z-score of 2.20, which makes it the most overvalued fund of all from a statistical perspective. I just want to move your sight a little bit on the right, where we can notice the tiny discount at which the CEF is trading. I could not say that this would be my biggest "Sell" position in my portfolio, having in mind that the spread between the price and the NAV has narrowed lately.

Source: cefconnect.com

2. Baseline Expense:

Source: cefconnect.com

As shown in the table above, most of the funds charge their investors more than 1.20% for managing their portfolio. For me that is a quite high fee to ask. Only two of the funds charge taxes below 1%.

3. 5-Year Return On NAV:

Source: cefconnect.com

Above, we can review the returns on net asset value over the past five years. On the top of the "givers" chart, we can find the JH Premium Dividend Fund (PDT) with its 10.04%. Basically, the group distributes more than delightful returns to their investors, which is a sign of reliability for the sector. Of course, we should not forget that these numbers and results are no guarantee of future performance.

4. Discount/Premium:

Source: cefconnect.com

Trading at a premium of 9.67% makes the JH Premium Dividend Fund (PDT) the most overpriced CEF in the group. It also has a positive Z-score of 1.70 as we can see.

Source: cefconnect.com

The chart above shows that it is not unusual for the fund to be trading at a premium, but we should have in mind that the spread between the NAV and the price has widened a lot since the last month.

As we already discussed, the two 'brothers' from the Nuveen family - JPS and JPC - have the most widen discount of all in the group. They are followed by the First Trust Intermediate Duration Preferred & Income Fund (FPF), which is trading below its net asset value of -7.26%.

5. Effective Leverage:

Source: cefconnect.com

When we take a look at the leverage of these funds, we should probably understand the delightful returns that they provide to the investors. Do not underestimate the effect of the leverage, and be sure it's included in your analysis. However, the preferred CEFs have a leverage between 20% and 35%.

6. Distribution Rate:

Source: cefconnect.com

Here we can observe the distribution rates between the different closed-end funds.


The sector is continuing its fine and stable performance. Since now half of the year is left behind, we could say that the sector is definitely emerging from its depressed levels in which it was at the beginning of the year. We truly believe that the sector will continue to excel in the foreseeable future.

Note: This article was originally published for our subscribers on 7/01/2018, and some figures and charts may not be entirely up to date.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in JPS, FPF over the next 72 hours. 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.