Weekly Review Of Preferred Stock CEFs: Once Again The Bond ETF Made A New High During The Past Trading Week

Includes: HPI, JPI
by: Arbitrage Trader

The main benchmark of the sector looks quite stable.

The bond ETF made a new high during the past week.

Judging by the numbers, the group is trading at normal levels.


The closed-end funds in the sector start to look more 'confident' as we can see it in their results. Today, we will see only positive Z-scores and higher premiums. The average results for the sector are significantly higher than last time, and we start to see some interesting movements and opportunities in the sector. The leading benchmarks are stable as a rock, the interest rates continued lowering, so I do think that things are safe for now.

The News

Over the past week, the Nuveen Preferred and Income Term Fund (JPI) announced its regular distribution of $0.1355 per share:

Source: yahoo.finance.com

The Benchmark

The week was positive for the leading benchmark of the preferred stock sector. On Friday, the ETF closed the trading almost at its 52-week high. The trading volume was at its average levels. PFF scored a really nice week. On a weekly basis, the fund gained $0.18 per share.

Source: barchart.com - PFF Daily Chart (6 months)

New week, new high for the iShares 20+ Year Treasury Bond ETF (TLT). The bond ETF started the new week powerful by reaching a new high point of $132.58 per share. However, the following days were not so powerful. As we see on Tuesday, the ETF opens with a gap on the downside and closes negative. By the last closing bell, TLT finishes at a price of $131.74 per share. On a weekly basis, this is a drop of $0.09 per share.

Source: barchart.com - TLT Daily Chart (6 months)

Source: cnbc.com - 10-Year Treasuries

1. Sorted By Z-Score

Source: Cefconnect.com

The Z-scores in the sector are significantly higher today compared to our previous review. The lowest score today is 0.70. Modest but still positive. Last time, we had results below -9.00.

We have new leader in the chart today. The most overvalued closed-end fund is the John Hancock Preferred Income Fund (HPI). The CEF has a 2.30 Z-score which is the highest in the sector. Last week, HPI was second in the chart with a result of 2.00. The CEF trades at a higher premium as well.

The silver medal goes to the Cohen & Steers Select Preferred and Income Fund (PSF). The preferred CEF has a positive Z-score of 2.20 and also trades at a high premium.

The Flaherty & Crumrine Preferred Income Opportunity Fund (PFO) lays at the bottom of the table with a modest but still positive result of 0.70 points.

The average Z-score in the sector is 1.50.

2. Baseline Expense

Source: Cefconnect.com

The most "expensive" preferred closed-end fund is the John Hancock Premium Dividend Fund (PDT). 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. And, as we already mentioned, the performance of the sector let us take a look at the most generous CEFs in the group.

3. 5-Year Return On NAV

Source: Cefconnect.com

The aim of the above ranking is to show us the closed-end funds with higher yields based on the net asset value. The combination of the return with the other metrics that we have is a foundation of our research for potential "Long" candidates.

As we can easily see from the table, the John Hancock Premium Dividend Fund is not only the most expensive fund but also the most generous as well. The average return in the preferred sector is 7.51%. PDT has a return over 8.90%, which is way above the average result, as we can see.

4. Discount/Premium

Source: Cefconnect.com

The John Hancock Preferred Income Fund (HPI) caught my attention today due to its statistical result, NAV/Price spread and the fact that the CEF reached a new high during the past trading week. Below, on the chart, you can easily see how HPI traded during the week:

Source: barchart.com - HPI Daily Chart (6 months)

On Friday, the closed-end fund reached and closed at a new high point of $23.33 per share. HPI is trading at a 10.81% premium which is almost at its 52-week high. The spread is quite wide at the moment:

Source: Cefconnect.com

The chart translated into numbers:

Source: Cefconnect.com

In the upcoming days, the CEF will distribute its monthly dividend of $0.14 per share:

Source: Cefconnect.com

Despite that, the CEF seems overvalued looking at the numbers and statistics; in this friendly environment, I would hold the fund until its ex-date as it is a good dividend capture.

Today, the average premium in the sector is 2.07%.

5. Effective Leverage

Source: Cefconnect.com

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

Source: Cefconnect.com

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 07.04%, and the average yield on net asset value is 6.90%.


If we only judge by the numbers in the tables, we would see that these funds look a little bit overvalued here. And this might be the case, but when I look at the interest rates and the leading benchmarks, I only see "Buy" candidates, dividend captures, and so on. However, it is good to have in mind which CEFs are the most overvalued ones in case of an unpleasant situation. A good trader always has a hedging reaction.

Note: This article was originally published on June 9, 2019, and some figures and charts might not be entirely up to date.

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.