Preferred Stock Index Fund

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elainet7
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Preferred Stock Index Fund

Post by elainet7 » Fri Oct 04, 2019 5:10 pm

PFF or PFFD Any thoughts for income portfolio??

mhalley
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Re: Preferred Stock Index Fund

Post by mhalley » Fri Oct 04, 2019 5:39 pm

Bogleheads as a general rule do not care for income portfolios.
From the wiki
As a hybrid product in between stocks and bonds, just like junk bonds--
Junk bonds are stockish bonds, preferred stocks are bondish stocks...

-- Can you talk me out of Preferred Stocks?
For the reasons above, investment in preference stock is usually not recommended. The risk-return tradeoffs are unfavourable for individual investors and those seeking corporate credit risk exposure are better advised to invest in corporate bond funds, whilst those seeking equity upside are advised to invest in diversified index funds made up of common stock (like Vanguard Total Stock Market).
You might check out Vanguard’s paper on total return vs dividend investing
https://www.vanguard.co.uk/documents/ad ... esting.pdf
The current low-yield environment is leading many investors to focus on only one piece of their portfolio’s total return, namely, the income return. This focus may be encouraging investors to consider strategies such as reallocating to non-traditional bonds, property investments, and equity income strategies. Investors may adopt one or more of these strategies in the belief that they will be rewarded with a more certain level of income or less risk. Unfortunately, there may be a number of unintended consequences when moving away from a broadly diversified portfolio.
Concentrating on higher yielding sectors results in a less diversified portfolio, higher levels of risk, decreased tax-efficiency (for taxable investors), and/or an increased chance of falling short of long-term financial goals. On the other hand, as we discussed in this paper, a total- return approach potentially offers a number of portfolio benefits, including maintaining diversification, enhancing the portfolio’s tax-efficiency, allowing more focus on the size of the overall portfolio, and increasing the portfolio’s longevity.

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Re: Preferred Stock Index Fund

Post by nisiprius » Fri Oct 04, 2019 5:43 pm

1) Investors probably don't need a specific "income portfolio." Total return is total return, whether it comes from dividends or capital appreciation. And you can pull any amount of money you want from a mutual fund or ETF at any time, at next to no cost, regardless of how the fund is making money. It is not like it was fifty years ago, when it was hard to sell small amounts of stock on a monthly basis, so the only feasible way to get monthly income from stocks was by choosing dividend-paying stocks (common and preferred).

2) Just because preferred stock has some bond-like properties and stock-like qualities doesn't automatically make it the best of both worlds, just a mixture of both worlds. In fact, the Bogleheads' wiki article on preferred stocks says:
In a sense then preference stock often combines the worst features of corporate bonds (frequently callable; lack of upside) with those of common stock (little protection in bankruptcy; possibility dividend will be omitted). In addition portfolios of preference shares are highly concentrated around financial companies, thus reducing diversification.
3) Preferred stock isn't a normal thing nowadays, it's a sort of special thing used by certain kinds of companies for certain purposes. As a result, it has a sector profile that is pretty lumpy. Did you understand that you'd be investing 80% of your money into just two sectors, utilities and financials?

Morningstar, PFF, "portfolio" tab

Image

4) Vanguard used to have a preferred stock fund. They liquidated it in 2001. I don't know why.

5) The Bogleheads' wiki article on preferred stocks concludes: "For the reasons above, investment in preference stock is usually not recommended."
Last edited by nisiprius on Fri Oct 04, 2019 5:54 pm, edited 1 time in total.
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Re: Preferred Stock Index Fund

Post by Northern Flicker » Fri Oct 04, 2019 5:49 pm

elainet7 wrote:
Fri Oct 04, 2019 5:10 pm
PFF or PFFD Any thoughts for income portfolio??
Companies have no legal obligation to make preferred stock dividend payments, and if it is suspended, the preferred stock price will usually plummet at the same time. The only requirement is that they must be current with preferred dividends in order to declare a dividend for common shares.

Generally preferred stock has stock-like downside and bond-like upside, with a good dividend rate. Banks who hold them get a tax benefit that individuals do not get. As a result, the yield is generally not adequate to compensate for the risk. There are plenty of other investment options. Just say no to preferred stock.
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Re: Preferred Stock Index Fund

Post by stlutz » Fri Oct 04, 2019 8:33 pm

I would compare them to high yield/"junk" bonds except preferred stocks are issued mostly by banks & financial companies while HY bonds are mostly issued by other types of companies. Preferred stocks are more volatile than the high yield bonds, but they have similar properties to each other.

I tend to disagree with claims that they are not a valid type of asset to invest in.

That said, I don't invest in any preferred stock funds and wouldn't do so with more than 2 or 3% of my portfolio.

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Re: Preferred Stock Index Fund

Post by DonIce » Fri Oct 04, 2019 9:12 pm

Preferred stocks have a low correlation with both common stocks and bonds. In some portfolios, they may work well as a diversifier. I have a small position in PFF in my Roth.

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Re: Preferred Stock Index Fund

Post by Longtermgrowth » Sat Oct 05, 2019 5:39 am

Unless trading frequently, seems PFFD would be the better deal when looking at expense ratios and average spread. Even paying your broker for a block trade, if dealing with a larger amount, would be better than holding the higher expense ratio fund for many years... Just my opinion on the two funds.

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elainet7
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Re: Preferred Stock Index Fund

Post by elainet7 » Sat Oct 05, 2019 11:46 am

Wonder why rick Ferri incorporates them in to his core 4 income portfolio
My community invests some of their reserve fund in preferreds

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Re: Preferred Stock Index Fund

Post by Broken Man 1999 » Sat Oct 05, 2019 4:18 pm

I tip-toed into the preferred stock water a couple of years ago. I bought CODI Preferred A 7.25%. I bought the first batch at $25/share, and some more later on so even with current price less than $25/share, I'm still in the green. It is callable, IIRC in 2020.

Overall I am getting about 8% on my investment.

CODI has some name-brand holdings, familiar names like Liberty Safes, Sterno, Crosman.

I don't have a great deal in it, and the payments are very nice, juices things up a bit in this low-yield environment, though certainly with more risk.

When I see the top holdings of PFFD, I am put off by the amount of financial services, not sure I want more more of that sector. The financial holdings are represented with quality companies, but still.... I'm just not enthused.

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Re: Preferred Stock Index Fund

Post by Northern Flicker » Sat Oct 05, 2019 4:50 pm

elainet7 wrote:
Sat Oct 05, 2019 11:46 am
Wonder why rick Ferri incorporates them in to his core 4 income portfolio
My community invests some of their reserve fund in preferreds
Rick Ferri also likes junk bonds, which are similar to many preferred stocks. Preferred stock is used by companies without good enough credit to tap into the investment grade credit markets. If they have to pay a high interest rate, preferred stock does not legally bind them to it when they don’t have the revenue to make a payment. They can suspend the payments without it being a default.

Higher credit quality preferreds are generally financial institution issues. This is because it can count towards capital reserves (though that is changing or has changed) so there is interest in banks holding each other’s preferred issues, and there is preferential tax treatment of the dividend income. The problem here is uncompensated sector concentration risk in the financial sector. Financial preferreds got clobbered much worse than market-cap stock indices in the 2008/2009 market turmoil. E.g. take a look at PGF at that time. Banks holding each other’s preferred stock is a (small) source of financial contagion— it basically transfers some revenue from bank A that issued the preferred stock to bank B that bought it, so revenue issues at one bank can affect others.
Last edited by Northern Flicker on Sun Oct 06, 2019 1:08 am, edited 1 time in total.
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Re: Preferred Stock Index Fund

Post by nedsaid » Sat Oct 05, 2019 6:51 pm

DonIce wrote:
Fri Oct 04, 2019 9:12 pm
Preferred stocks have a low correlation with both common stocks and bonds. In some portfolios, they may work well as a diversifier. I have a small position in PFF in my Roth.
I would think there would be a mild diversification benefit to Preferred Stocks but have never invested in them myself. I did see a Larry Swedroe article on this very index and as you can see he did not recommend it.

https://www.advisorperspectives.com/art ... safe-bonds

Some reasons that Larry gives for not buying these:

1) These are like bonds with no maturity.
2) Preferred stocks come with a call risk, that is companies can pay these back at will.
3) The companies that issue these tend to have lower credit ratings.
4) Dividends are issued at the discretion of the company, dividends can be suspended during tough times.
5) As Nisiprius noted above, you get sector concentration particularly in the financial sector.
6) These have equity-like risk.
7) These issues rarely trade above issue price.

So it looks to me that these are like High Yield Bonds but with less upside. Again, I have no experience with these myself.
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Re: Preferred Stock Index Fund

Post by nisiprius » Sat Oct 05, 2019 7:29 pm

Since some posters are suggesting a diversification benefit, I went into PortfolioVisualizer and asked it for the optimum portfolio of VTSAX (total stock), VBTLX (total bond), and PFF.

Source

Image

Since inception of PFF, the optimum allocation to PFF has been zero; that is, any diversification benefits did not justify the general low-return-for-risk of PFF.

There are dozens of qualifications that need to be stated. The time period, Jan 2008-Sep 2019 is an unusual one and the optimum portfolio was 11% stocks, 89% bonds! And it is not at all clear how useful this kind of analysis is. Among other things it tends to be hugely sensitive to time period.
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Re: Preferred Stock Index Fund

Post by HEDGEFUNDIE » Sat Oct 05, 2019 7:30 pm

Skip em

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Re: Preferred Stock Index Fund

Post by Northern Flicker » Sun Oct 06, 2019 1:10 am

elainet7 wrote:
Sat Oct 05, 2019 11:46 am
Wonder why rick Ferri incorporates them in to his core 4 income portfolio
My community invests some of their reserve fund in preferreds
With all due respect, I have a feeling the members of your community are looking at the yield but are not aware of the substantial risk being taken.
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Re: Preferred Stock Index Fund

Post by DonIce » Sun Oct 06, 2019 1:17 am

nisiprius wrote:
Sat Oct 05, 2019 7:29 pm
Since some posters are suggesting a diversification benefit, I went into PortfolioVisualizer and asked it for the optimum portfolio of VTSAX (total stock), VBTLX (total bond), and PFF.
Yeah I did the same check on PV. Any idea if there are some funds that go back further in time than PFF that are representative of preferreds as a class?

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Re: Preferred Stock Index Fund

Post by frcabot » Sun Oct 06, 2019 2:24 am

One plus for preferred stocks over junk/high yield bonds is that some preferred stocks pay out qualified dividends, that are taxed at a lower rate, versus the ordinary income of bonds. I believe there are etfs and mutual funds that invest only in qualified dividend preferred stocks.

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Re: Preferred Stock Index Fund

Post by Northern Flicker » Sun Oct 06, 2019 2:26 am

PPSAX is the oldest preferred stock fund I know of— back to around 2005. Probably there are older ones. It probably also holds convertible securities.
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Re: Preferred Stock Index Fund

Post by Northern Flicker » Sun Oct 06, 2019 3:16 am

Adding to nisiprius’s posting, preferred stock has both stock and bond properties. How then has PFF compared to a balanced 60/40 portfolio of stock and bonds? Not very well. It has had a substantially lower return, substantially higher volatility, and substantially larger max drawdown:

https://www.portfoliovisualizer.com/bac ... 0&total3=0

With 60% of its assets in the financial sector, PFF has been more of a risk concentrator than a risk diversifier.
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Re: Preferred Stock Index Fund

Post by petulant » Sun Oct 06, 2019 9:54 am

There are some reasons to think preferred stocks have no place in the average investor's balanced portfolio. They are mainly issued by utilities and financial companies to meet regulatory capital requirements. Financial companies must maintain a certain amount of equity in their capital structure, so they sometimes issue preferred stock to maintain capital without diluting common stock shareholders. Utilities sometimes issue preferred stock to maintain capital-debt % for bond ratings without running afoul of regulators who prefer low common stock %.

Further, preferred stocks have tax advantages when held by corporations due to the dividends received tax deduction. The result of the tax difference may be that average investors do not receive the same benefit as corporations such that the equilibrium valuation of preferred stock could be too expensive for average investors but marginally acceptable for corporations.

So, in relation to efficient capital markets, preferred stock should be expected to offer at best marginal returns to average investors, but possibly worse. Given that, I would suggest that the expense ratio means that an average investor should expect worse returns when holding even an index fund of these securities. These funds have an expense ratio of about .50%, which is much higher than the stock and bond funds to which we have access.

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Re: Preferred Stock Index Fund

Post by grabiner » Sun Oct 06, 2019 10:45 am

petulant wrote:
Sun Oct 06, 2019 9:54 am
Further, preferred stocks have tax advantages when held by corporations due to the dividends received tax deduction. The result of the tax difference may be that average investors do not receive the same benefit as corporations such that the equilibrium valuation of preferred stock could be too expensive for average investors but marginally acceptable for corporations.
This is probably the most important point, as it gives a reason for individual investors to avoid preferred bonds, consistent with an efficient market. In an efficient market, all investments are priced to give an appropriate trade-off of return for risk for those investors who hold them. But it is quite reasonable for an investment to be held only by those investors who can get higher returns from it, or are less sensitive to its risk. There are many other examples:

Tax-exempt investors, and investors in low tax brackets, do not hold municipal bonds; taxable investors in high tax brackets hold few corporate bonds.
NY investors hold more NY municipal bonds.
Pension funds and insurance companies, with long-term fixed-dollar liabilities, hold more long-term nominal bonds, reducing the risk premium for individuals holding them.
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Re: Preferred Stock Index Fund

Post by nedsaid » Sun Oct 06, 2019 10:59 am

Northern Flicker wrote:
Sun Oct 06, 2019 1:10 am
elainet7 wrote:
Sat Oct 05, 2019 11:46 am
Wonder why rick Ferri incorporates them in to his core 4 income portfolio
My community invests some of their reserve fund in preferreds
With all due respect, I have a feeling the members of your community are looking at the yield but are not aware of the substantial risk being taken.
There is an old saying that more money has been lost chasing yield than at the point of a gun. One of the truest things ever said regarding investing. I think of them as sort of a self liquidating investment as many high yield investments tend to be. I remember a friend of mine, since deceased, had a managed account at a brokerage that owned some preferred stocks. My friend said that the yield was great but that the price kept dropping. Sort of like buying an oil well and watching production fall over time. This sometimes happens with High Yield Bond funds, the Net Asset Value sometimes keeps dropping though if you reinvest dividends you will be just fine. Really high yield from a stock or bond often represents a return of capital.
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Re: Preferred Stock Index Fund

Post by BH+ » Sun Oct 06, 2019 11:24 am

The risk and return profile of preferred shares is closest to long term corporate bonds in terms of credit and duration risks. The CAGRs of PFF and LQD since 2008 have been almost equal, but PFF had a draw down of about 55% versus 15% for LQD in the financial crisis.

Preferred shares do not seem to add much diversification value to a mixture of stocks and bonds. One scenario where preferred shares could potentially outperform common stocks is if common returns are muted due to PE contraction but earnings remaining healthy. In this case, preferred stocks (and corporate bonds) would keep paying their dividends and returns would not suffer. This scenario is unlikely to last for extended periods of time.

Most people who do advocate using preferred shares recommend it be limited to no more than 20% of one's portfolio. Given the credit and duration risk of preferred shares, the best diversifier would be short term government fixed income.

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Re: Preferred Stock Index Fund

Post by Northern Flicker » Sun Oct 06, 2019 1:38 pm

There is an old saying that more money has been lost chasing yield than at the point of a gun. One of the truest things ever said regarding investing.
I think it is just a mixed up analogy, equating the trauma of having a gun pointed at you (and a small financial loss) to the pain of a much larger loss from making a bad investment decision.
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Re: Preferred Stock Index Fund

Post by nedsaid » Sun Oct 06, 2019 3:48 pm

Northern Flicker wrote:
Sun Oct 06, 2019 1:38 pm
There is an old saying that more money has been lost chasing yield than at the point of a gun. One of the truest things ever said regarding investing.
I think it is just a mixed up analogy, equating the trauma of having a gun pointed at you (and a small financial loss) to the pain of a much larger loss from making a bad investment decision.
All analogies break down at some point, the odds of getting robbed by gunpoint are pretty low and yet is pretty traumatic. Losing money from a bad investment is not life threatening unless it puts you into an unbearable depression. The point is that people ignore the most likely risks and focus on those rare but traumatic events. A pithy saying is not 100% literally true, it is a device to illustrate a point. I suppose we could parse the parables while missing the point of the story.
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Re: Preferred Stock Index Fund

Post by vineviz » Sun Oct 06, 2019 4:41 pm

nisiprius wrote:
Sat Oct 05, 2019 7:29 pm
Since some posters are suggesting a diversification benefit, I went into PortfolioVisualizer and asked it for the optimum portfolio of VTSAX (total stock), VBTLX (total bond), and PFF.
Because some posters mentioned "diversification" you looked at some measures that have nothing to do with diversification? I'm confused.

I agree with your conclusion, which seems to be that PFF offered no benefit in terms of ex-post Sharpe ratio. But Sharpe ratio is a measure of risk-adjusted return, not diversification.

Because most of the risk of preferred stock is well-explained by traditional factors (market, duration, credit), it does - in fact - turn out that preferred stock offers no diversification benefit except for portfolios with very high fixed income allocations (i.e. more than 60% bonds). And even then the benefits relative to conventional bonds (e.g. BND or AGG) are incredibly slight.
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Re: Preferred Stock Index Fund

Post by mjb » Sun Oct 06, 2019 9:19 pm

Ideally, one that broadly invested in fixed income and equities would include high yield bond, convertible bonds, preferred stock, senior loans, municipal bonds, etc. in a portfolio in proportion to their share of the market. However, taxes and other factors affect the relative weightings.

Example: today intermediate and long term municipal are priced to a 25% tax bracket while municipal money markets and short terms are priced to a 35% tax bracket. A user of municpals has to be very conscious of changes to tax laws to ensure they get a reasonable deal. Preferred stock's odd structure with taxes can make it sub optimal for average investors.

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Re: Preferred Stock Index Fund

Post by Rick Ferri » Sun Oct 06, 2019 9:34 pm

elainet7 wrote:
Sat Oct 05, 2019 11:46 am
Wonder why rick Ferri incorporates them in to his core 4 income portfolio
My community invests some of their reserve fund in preferreds
I personally own PFFD.

But don't buy what you don't understand. This asset class is not for everyone. Preferred stocks are mainly issued by finance companies that must stay below certain debt levels for banking regulations. However, the companies don't want to issue common stock because of shareholder dilution. Preferred stock solves the riddle. It's high yielding equity that acts like debt. In addition, about 60% of the dividends are qualified, making this suited for taxable accounts.

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Re: Preferred Stock Index Fund

Post by Valuethinker » Mon Oct 07, 2019 8:04 am

nedsaid wrote:
Sun Oct 06, 2019 3:48 pm
Northern Flicker wrote:
Sun Oct 06, 2019 1:38 pm
There is an old saying that more money has been lost chasing yield than at the point of a gun. One of the truest things ever said regarding investing.
I think it is just a mixed up analogy, equating the trauma of having a gun pointed at you (and a small financial loss) to the pain of a much larger loss from making a bad investment decision.
All analogies break down at some point, the odds of getting robbed by gunpoint are pretty low and yet is pretty traumatic. Losing money from a bad investment is not life threatening unless it puts you into an unbearable depression. The point is that people ignore the most likely risks and focus on those rare but traumatic events. A pithy saying is not 100% literally true, it is a device to illustrate a point. I suppose we could parse the parables while missing the point of the story.
There's a whole range of jokes and popular parlance that have just lost any sense of being "fun" since Columbine, say. "I could shoot him" etc. Many an English boarding school student shared the fantasy of the movie "IF" where the students machine gun the attendees on prize giving day - but it's not funny nor satiric any more.

Agree these events are salient rather than frequent in any sense.

It's probably just an aphorism that has outlived its sell-by date, due to changing lived experience in the real world?

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Re: Preferred Stock Index Fund

Post by elainet7 » Mon Oct 07, 2019 9:03 am

We have owned vanguard hi yield bonds for a very long time and now added preferred stock etf at a very small% of portfolio

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Re: Preferred Stock Index Fund

Post by nisiprius » Mon Oct 07, 2019 9:12 am

vineviz wrote:
Sun Oct 06, 2019 4:41 pm
...Because some posters mentioned "diversification" you looked at some measures that have nothing to do with diversification? I'm confused...
You and I must agree to disagree on the meaning of "diversification," because we have it means different things to us, and you have yet to present evidence that your definition is a consensus understanding in financial economics.

Actually I'm not sure if I remember what your definition is--I think it is the "diversification ratio?"

Without double-checking, and therefore laying myself open to making some goof of my own, to me "diversification" means what I think it meant to Markowitz: an improvement in risk-adjusted return, measured usually by the Sharpe ratio, produced by combining assets that have similar risk-adjusted returns by themselves, but low correlation with each other.
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Re: Preferred Stock Index Fund

Post by vineviz » Mon Oct 07, 2019 11:12 am

nisiprius wrote:
Mon Oct 07, 2019 9:12 am
Without double-checking, and therefore laying myself open to making some goof of my own, to me "diversification" means what I think it meant to Markowitz: an improvement in risk-adjusted return, measured usually by the Sharpe ratio, produced by combining assets that have similar risk-adjusted returns by themselves, but low correlation with each other.
This definition conflates two related, but different concepts.

An "improvement in risk-adjusted return, measured usually by the Sharpe ratio" describes an improvement in mean-variance efficiency, which can be achieved with or without an increase in diversification. A classic (albeit tired) illustration of this would be the observation that a portfolio of 50% McDonald's and 50% Amazon.com has had a higher risk-adjusted return (according to the Sharpe ratio) than Vanguard Total Stock Market, but even I wouldn't argue that the 2-stock portfolio was more diversified than VTSMX.

"Combining assets [which have] low correlation with each other" is a partial characterization of Markowitz diversification. The main omission is variance, which is a critical component of the diversification equation, and it glosses over the nuance that the process of portfolio diversification depends on the correlation of the marginal assets with the portfolio as a whole. More importantly, Markowitz diversification neither presumes nor requires that the assets being combined "have similar risk-adjusted returns by themselves". An illustration here might be the observation that iShares US Treasury Bond ETF (GOVT) and iShares Edge MSCI Min Vol USA ETF (USMV) have had very different risk-adjusted returns, yet a portfolio which combines them is more diversified than a portfolio which holds just one or the other.

If you want a common language definition of diversification that is reasonably accurate, I'd offer that diversification is the process of balancing amount of risk exposure in the portfolio across the independent sources of risk. You could also say that diversification refers to the degree to which the risks are balanced. The level of overall expected risk and level of overall expected return are undoubtedly important to the investor, but neither is directly related to diversification.
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Re: Preferred Stock Index Fund

Post by Northern Flicker » Mon Oct 07, 2019 10:53 pm

Preferred stock solves the riddle. It's high yielding equity that acts like debt.
It is not 100% like debt. Debt has a contractual obligation to make repayments. The only downside of a company suspending dividends to preferred shareholders is that it cannot distribute dividends to common shareholders or execute buybacks without making preferred dividend payments. This is why preferred shares have stock-like downside. It is just their upside that acts like debt.

And non-cumulative preferreds only have to start making payments again to declare dividends to common shareholders. They do not have to make the back payments. So non-cumulative preferreds are even less like debt than cumulative ones.
Last edited by Northern Flicker on Tue Oct 08, 2019 1:10 pm, edited 2 times in total.
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Re: Preferred Stock Index Fund

Post by petulant » Tue Oct 08, 2019 6:52 am

Northern Flicker wrote:
Mon Oct 07, 2019 10:53 pm
Preferred stock solves the riddle. It's high yielding equity that acts like debt.
It is not 100% like debt. Debt has a contractual obligation to make repayments. The only downside of a company suspending dividends to preferred shareholders is that cannot distribute dividends to common shareholders or execute buybacks without making preferred dividend payments. This is why preferred shares have stock-like downside. It is just their upside that acts like a bond.

And non-cumulative preferreds only have to start making payments again to declare dividends to common shareholders. They do not have to make the back payments. So non-cumulative preferreds are even less like debt than cumulative ones.
Given the information asymmetry at issuance, callable rights at a certain date, lack of cumulative nature for many issues, etc., it is a wonder they are not often priced more attractively. Makes me think there is a market for these at certain corporations that we don't know about, who really like the dividends received deduction. I still think they shouldn't be recommended for average investors.

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Re: Preferred Stock Index Fund

Post by MD9NYC » Tue Oct 08, 2019 7:52 am

In addition to the qdi, you can also find preferred that are fixed to floating, or floating rate, which can be quite lucrative during a rising rate environment. Not that we’ll see one anytime soon...

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Re: Preferred Stock Index Fund

Post by Northern Flicker » Tue Oct 08, 2019 11:15 pm

It is useful to see a backtest of VTSAX (total stock market index), PFF, and PGF, and to notice their drawdowns during the 2008/2009, and to observe their volatilities. The behavior of PFF and PGF had no resemblance to bond-like behavior in the downturn, with larger drawdowns even than a total market stock index fund:

https://www.portfoliovisualizer.com/bac ... total3=100
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Rick Ferri
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Re: Preferred Stock Index Fund

Post by Rick Ferri » Wed Oct 09, 2019 4:46 am

Northern Flicker wrote:
Mon Oct 07, 2019 10:53 pm
Preferred stock solves the riddle. It's high yielding equity that acts like debt.
It is not 100% like debt. Debt has a contractual obligation to make repayments. The only downside of a company suspending dividends to preferred shareholders is that it cannot distribute dividends to common shareholders or execute buybacks without making preferred dividend payments. This is why preferred shares have stock-like downside. It is just their upside that acts like debt.
I did not say it was debt. I said, "It's high yielding equity that acts like debt." although more like BB debt than investment grade.

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Re: Preferred Stock Index Fund

Post by Northern Flicker » Wed Oct 09, 2019 12:33 pm

It would be similar to (if a little riskier than) BB debt but with uncompensated sector concentration risk.

Diversified high yield debt fared much better in 2008/2009:

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Re: Preferred Stock Index Fund

Post by Rick Ferri » Wed Oct 09, 2019 8:43 pm

Northern Flicker wrote:
Wed Oct 09, 2019 12:33 pm
It would be similar to (if a little riskier than) BB debt but with uncompensated sector concentration risk.

Diversified high yield debt fared much better in 2008/2009:

https://www.portfoliovisualizer.com/bac ... total3=100
Expected given that preferred is mostly financial stocks as I explained. So, in a financial crisis, it is expected to perform poorly.

I'm not big on overly protecting a portfolio from the last crisis. That's like training to fight the last war. Preferred stocks are not for everyone. If you don't understand something, don't buy it.

Rick
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Re: Preferred Stock Index Fund

Post by Northern Flicker » Wed Oct 09, 2019 10:19 pm

Expected given that preferred is mostly financial stocks as I explained. So, in a financial crisis, it is expected to perform poorly.

I'm not big on overly protecting a portfolio from the last crisis. That's like training to fight the last war.
Sector concentration is a well known uncompensated risk that investors should not take. It materialized in 2008/2009, and remains a significant uncompensated risk for the future.
Index fund investor since 1987.

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elainet7
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Re: Preferred Stock Index Fund

Post by elainet7 » Thu Oct 10, 2019 7:06 am

Sticking with PFFD for a small % of my income portfolio

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Re: Preferred Stock Index Fund

Post by Rick Ferri » Thu Oct 10, 2019 7:13 am

Northern Flicker wrote:
Wed Oct 09, 2019 10:19 pm
Expected given that preferred is mostly financial stocks as I explained. So, in a financial crisis, it is expected to perform poorly.

I'm not big on overly protecting a portfolio from the last crisis. That's like training to fight the last war.
Sector concentration is a well known uncompensated risk that investors should not take. It materialized in 2008/2009, and remains a significant uncompensated risk for the future.
Then you shouldn't buy a house.

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

capjak
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Re: Preferred Stock Index Fund

Post by capjak » Thu Oct 10, 2019 10:04 am

I own individual preferred appx 6% of investable assets...some since August 2015 with qualified dividends average yield is 5-6% ($18,000 per year qual dividend) :
FYI...
These got killed during the financial crisis like other stocks ....
but I intend to hold them for a long time or until they are called
some have been callable for 10+ years rating are Moody's and s&P
Also some have very low volume and therefore not very liquid.

AILLL ratings Baa2 BBB- purchase 08/2015 cost $25.63 current value $27.00
CNLPL ratings Baa2 A- purchase 08/2015 cost $52.72 current value $57.15
CNTHP ratings Baa2 A-purchase 08/2015 cost $52.23 current value $55.55
NIPRB ratings Ba1 BBB- purchase 11/2018 cost $24.90 current value $27.95
WFC-L ratings Baa2 BBB- purchased 12/ 2016 cost $1166, current value $1505
CHSCM ratings Not Rated.. purchase 03/2016 cost $25.54 current value $26.66

research them on http://www.quantumonline.com

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Re: Preferred Stock Index Fund

Post by Northern Flicker » Thu Oct 10, 2019 11:42 am

Rick Ferri wrote:
Thu Oct 10, 2019 7:13 am
Northern Flicker wrote:
Wed Oct 09, 2019 10:19 pm
Expected given that preferred is mostly financial stocks as I explained. So, in a financial crisis, it is expected to perform poorly.

I'm not big on overly protecting a portfolio from the last crisis. That's like training to fight the last war.
Sector concentration is a well known uncompensated risk that investors should not take. It materialized in 2008/2009, and remains a significant uncompensated risk for the future.
Then you shouldn't buy a house.

Rick Ferri
I need a place to live. I don’t need preferred stock to meet any need that cannot be met easily another way. Absolutely the risk of buying a house should be compared to the risk of renting a house.
Index fund investor since 1987.

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Re: Preferred Stock Index Fund

Post by Voltaire2.0 » Thu Oct 10, 2019 12:36 pm

There is a lot of misinformation exchanged about preferred stock. Take this:

1) These are like bonds with no maturity.
True only in that preferreds are interest-rate sensitive, like utility stocks.Preferreds usually have higher yields than bonds from the same issuer.

2) Preferred stocks come with a call risk, that is companies can pay these back at will.
Call dates are stated and well known, just like bonds. That's why you calculate Yield to Worst before buying either.

3) The companies that issue these tend to have lower credit ratings.
Totally untrue.

4) Dividends are issued at the discretion of the company, dividends can be suspended during tough times.
True just like common stock dividends, but common dividends must be suspended before preferred dividends will be suspended.

5) As Nisiprius noted above, you get sector concentration particularly in the financial sector.
Only if you choose to buy financial preferreds or a ETF.

6) These have equity-like risk.
Totally untrue. Preferreds have much lower Betas than the corresponding common stocks. Preferred dividends also rank higher in priority than common dividends. Risk vs reward is still "a thing."

7) These issues rarely trade above issue price.
Totally untrue, especially in times of declining interest rates. I'm sitting on preferreds with 8% - 10% gains.

Preferreds can add income stability to a portfolio. I would not buy a preferred ETF but instead buy individual issues where I can assess the credit ratings, yields, likelihood of call and the quality of the issuing company.

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Re: Preferred Stock Index Fund

Post by petulant » Thu Oct 10, 2019 12:53 pm

Voltaire2.0 wrote:
Thu Oct 10, 2019 12:36 pm
There is a lot of misinformation exchanged about preferred stock. Take this:

1) These are like bonds with no maturity.
True only in that preferreds are interest-rate sensitive, like utility stocks.Preferreds usually have higher yields than bonds from the same issuer.

2) Preferred stocks come with a call risk, that is companies can pay these back at will.
Call dates are stated and well known, just like bonds. That's why you calculate Yield to Worst before buying either.

3) The companies that issue these tend to have lower credit ratings.
Totally untrue.

4) Dividends are issued at the discretion of the company, dividends can be suspended during tough times.
True just like common stock dividends, but common dividends must be suspended before preferred dividends will be suspended.

5) As Nisiprius noted above, you get sector concentration particularly in the financial sector.
Only if you choose to buy financial preferreds or a ETF.

6) These have equity-like risk.
Totally untrue. Preferreds have much lower Betas than the corresponding common stocks. Preferred dividends also rank higher in priority than common dividends. Risk vs reward is still "a thing."

7) These issues rarely trade above issue price.
Totally untrue, especially in times of declining interest rates. I'm sitting on preferreds with 8% - 10% gains.

Preferreds can add income stability to a portfolio. I would not buy a preferred ETF but instead buy individual issues where I can assess the credit ratings, yields, likelihood of call and the quality of the issuing company.
I would consider a similar approach if I was in the decumulation stage, but note that it's very different to recommend active, individual security analysis versus an index ETF.

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Re: Preferred Stock Index Fund

Post by Northern Flicker » Thu Oct 10, 2019 5:49 pm

Preferreds can add income stability to a portfolio. I would not buy a preferred ETF but instead buy individual issues where I can assess the credit ratings, yields, likelihood of call and the quality of the issuing company.
That would take security-specific risk of holding an individual stock, also an uncompensated risk. But it is not easy to hold a diversified portfolio of preferreds with 60% in the financial sector and most of the rest in utilities and REITs.

And while people calculate the beta relative to the broad common stock market of all sorts of things that do not belong to that market, it is an abuse of the concept. Beta is a coefficient of market return under CAPM. The return of a preferred stock is not defined by CAPM using a beta times market return.

I think Rick Ferri summed things up quite nicely, but in a different thread (that was on the topic of factor tilts) when he pointed out that market returns are yours for the taking if you hold market index funds of US and non-US common stocks and bonds.
Last edited by Northern Flicker on Wed Oct 16, 2019 10:45 pm, edited 1 time in total.
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Re: Preferred Stock Index Fund

Post by Longtermgrowth » Thu Oct 10, 2019 8:05 pm

I think if I held a decent chunk of PFFD, and happened to want to reduce financial exposure, I might pair it with PFXF (VanEck Vectors Preferred Securities ex Financials ETF) if the current 23% REITs in the fund didn't bother me: https://www.etf.com/PFXF#overview

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Re: Preferred Stock Index Fund

Post by abuss368 » Thu Oct 10, 2019 8:35 pm

Rick Ferri wrote:
Thu Oct 10, 2019 7:13 am
Northern Flicker wrote:
Wed Oct 09, 2019 10:19 pm
Expected given that preferred is mostly financial stocks as I explained. So, in a financial crisis, it is expected to perform poorly.

I'm not big on overly protecting a portfolio from the last crisis. That's like training to fight the last war.
Sector concentration is a well known uncompensated risk that investors should not take. It materialized in 2008/2009, and remains a significant uncompensated risk for the future.
Then you shouldn't buy a house.

Rick Ferri
Sad but true indeed.
John C. Bogle: "Simplicity is the master key to financial success."

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Re: Preferred Stock Index Fund

Post by Kagord » Thu Oct 10, 2019 10:01 pm

Northern Flicker wrote:
Wed Oct 09, 2019 10:19 pm
Expected given that preferred is mostly financial stocks as I explained. So, in a financial crisis, it is expected to perform poorly.

I'm not big on overly protecting a portfolio from the last crisis. That's like training to fight the last war.
Sector concentration is a well known uncompensated risk that investors should not take. It materialized in 2008/2009, and remains a significant uncompensated risk for the future.
But that risk could be mitigated if you could effectively insure and collateralize with a new security to cover the debt obligation should the underlying value be overstated, if I was a bank, I'd want that.

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Re: Preferred Stock Index Fund

Post by Northern Flicker » Fri Oct 11, 2019 1:55 pm

I’m not a bank. Security-specific risk is mitigated by diversification of holdings.
Index fund investor since 1987.

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