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



Currently, I cannot say that the sector is overvalued nor undervalued. The numbers tell us that the funds are trading at normal levels. The leading benchmark is trading in a sideways trend for a while now and looks stable. We have a couple of statistically overvalued closed-end funds.

The News

Over the past week, there were no news that could affect the sector’s performance:

Source: yahoo.finance.com

The Benchmark

The was short and calm for the fixed-income investors. The leading benchmark of the preferred stock sector (PFF) closed the week at negative territory. On a weekly basis, the ETF lost the modest $0.07 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). Over the past week, the bond ETF sky rocket to new high closing the week at a price of $131.83 per share. On a weekly basis, this is a gain of $3.95 per share or 2.29%.

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

The 10-year on the other hand fell to a new low of 2.13.

Source: cnbc.com – 10-Year Treasuries

1. Sorted By Z-Score

Source: Cefconnect.com

Today we have several preferred closed-end funds which are statistically overvalued. The undisputed leader in the table is the John Hancock Preferred Income Fund II (HPF). Currently, the CEF has a score of 2.10. HPF is trading at a high premium as well.

The silver medal goes to John Hancock Preferred Income Fund (HPI). A Z-score of 2.00 puts HPI right after its ‘brother’ – HPF. These two funds are quite overvalued from a statistical perspective and can be considered as a potential “Short” opportunities. Of course, we are only scratching the surface here. Deeper research is needed before entering a trade, especially in these hard times.

Despite that we have quite high statistical results there are funds which are with record low Z-scores. For example, the Nuveen Preferred and Income 2022 Term Fund (JPT) is the most undervalued CEF. JPT has a negative score of -9.10. Statistically, this fund is a screaming “Buy“. However, if we move our sight on the right we would see that JPT is almost trading at a premium. The current NAV/Price spread is above its average levels:

Source: Cefconnect.com

The average Z-score in the sector is -0.45.

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 the most generous as well. The average return in the preferred sector is 7.22%. PDT has a return over 8.90%, which is way above the average result, as we can see.

4. Discount/Premium

Source: Cefconnect.com

On a regular basis the John Hancock Premium Dividend Fund (PDT) is the leader in the frames of this metric and today does not make an exception. Currently, PDT trades at 10.81% premium. PDT compared to its peer group:

Source: cefdata.com

The John Hancock Preferred Income Fund (HPI) is third in the table with a 9.36% premium. The fund is hovering around its 52-week high which is 10.09%:

Source: Cefconnect.com

The resistance level is near around here and I would watch for “Sell” signals:

At the bottom of the chart we find the First Trust Intermediate Duration Preferred & Income Fund (FPF) which is the most undervalued in the frames of this metric. Currently, the CEF trades at a 5.32% discount which might seem quite low compared to the rest of the group, but if we take a look at the numbers we would see that FPF is actually trading above its average levels:

Source: Cefconnect.com

On the last trading day of the past week FPF had quite a fall:

Today, the average premium in the sector is 1.36%.

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 7.17% , and the average yield on net asset value is 6.98%.


Statistically I have couple of funds which a probable “Short” candidates but after all these are just numbers. It is not reasonable to rush when we see how stable are the leading benchmarks of the sector. Interest rates create a friendly environment for the group from which we can only take advantage.

Note: This article was originally published on June 2, 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.

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