Over the last year, 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.
Source: Yahoo Finance
Over the past week, there was no news that could affect the sector's performance.
The leading benchmark of the preferred stock sector (PFF) finished the week in positive territory. Recently, the ETF broke through its resistance level and continues adding gains. Currently, PFF is trading a little bit in a sideways trend. On Friday, the fund closed at a price of $35.55 per share. On a weekly basis, this is a gain of $0.16 per share.
Source: barchart.com - PFF Daily Chart (6 months)
As you know, we follow the performance of the U.S. Treasury bonds - considering them a risk-free product - with maturities greater than 20 years: the iShares 20+ Year Treasury Bond ETF (TLT). Quite a week for TLT. On Thursday, the bond ETF reached a new high of $126.69 per share. On a weekly basis, the benchmark has added to its price of $1.58 per share.
Source: barchart.com - TLT Daily Chart (6 months) 1. Sorted by Z-Score
The results continue higher this week as well. We can easily see a lot of funds trading with high Z-scores. Once again, there are no undervalued CEFs in the frames of this metric. The Nuveen Preferred and Income Term Fund (JPT) is the only one who has a negative result. However, its score is quite modest to be considered as undervalued.
The undisputed leader in this table today is the John Hancock Preferred Income Fund (HPI). The closed-end fund is the most overvalued in the sector with a Z-score of 2.20. Such a result is considered as quite high and, automatically, the fund is sent to our possible "Short" candidates. HPI is currently trading at a high premium as well.
The average Z-score in the sector is 0.90.
2. Baseline Expense
From the above table, we could get information on how much the different funds charge us for managing our portfolio. As we can see, the average charge in percent is 1.20%. Anything over 1% is a little bit high for me, but 1.20% is still acceptable, especially when we keep in mind the delightful performance of the sector.
3. 5-Year Return On NAV
The aim of the above ranking is to show us the closed-end funds with higher yields based on the net asset value. Combination of the return with the other metrics that we have is a foundation of our research for potential "Long" candidates.
The average return in the sector is 7.81%.
On a regular basis, the John Hancock Premium Dividend Fund (PDT) is the leader in the frames of this metric. Currently, PDT is trading at a 9.40% premium.
The silver medal today goes to the John Hancock Preferred Income Fund. As we already discussed, HPI is the most overvalued CEF from a statistical perspective. Here, we can see that the fund is trading at a quite high premium as well. The fund had quite a week:
Source: barchart.com - HPI Daily Chart (6 months)
The chart above clearly shows us that the preferred CEF is headed to its 52-week high. Will it break through its resistance? I do not know the answer for sure, but I would definitely add HPI to my probable "Sell" trades. Here, we have both statistical and technical edge to consider this CEF as a potential "Short". Let us take a look at the numbers:
The numbers tell us that HPI is getting close to its highs. The spread is quite wide as we can see beneath:
At the bottom of the table, we find the Nuveen Preferred & Income Term Fund. Despite that JPI has the widest NAV/price spread in the group, it is far from undervalued. Well, at least historically. At the moment, JPI is trading at a 5.31% discount. But the numbers show us that the fund is trading at its average levels:
Despite its wide discount, the First Trust Intermediate Duration Preferred & Income Fund (FPF) is trading above its average levels:
FPF distributes a $0.1425 dividend on the first trading day of April:
Source: barchart.com - FPF Daily Chart (6 months)
The average discount in the sector is 0.06%.
5. Effective Leverage
Leverage magnifies returns, both positively and negatively. And, we look at the effective leverage percentage, and we can understand these high-return results that the funds provide us with. This indicator is also quite important when we do our homework on the closed-end funds. Basically, what we have concluded is that the average leverage percent in the group is 31.65%.
6. Distribution Rate
Above, we saw what was the historical performance of the funds, but probably, most of you are interested in the current return which could be achieved, and that is the reason why I sorted the funds by the highest distribution rate.
The average yield on price for the sector is 7.29% and the average yield on net asset value is 7.29%.
Currently, most of the preferred closed-end funds look quite pumped around these levels. I am "Short" oriented in some of these CEFs as we already discussed. And here I just want to add that these funds are not junk stocks or without any value, I just see an opportunity in the price change which I want to catch and make money out of it. Some investors, on the other hand, would like to add while the fund's price drop and wait to collect its regular dividend. That is a fine strategy as well. It all depends on the profile of the trader.
Note: This article was originally published on March 31, 2019, and some figures and charts might not be entirely up to date.
Trade With Beta
At Trade With Beta, we also pay close attention to closed-end funds and are always keeping an eye on them for directional and arbitrage opportunities created by market price deviations. As you can guess, timing is crucial in these kinds of trades; therefore, you are welcome to join us for early access and the discussions accompanying these kinds of trades.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.