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Etf Pff
Old 08-16-2007, 11:44 PM   #1
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Etf Pff

There is an ETF for preferred stocks, PFF, seems like a miserable performer, but maybe it has a future? I wonder two things, is this a different asset class to hold? And assuming it is in a tax deferred IRA, what would be the right time (yes, I know this is a timing question) to buy this type of asset?

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Old 08-17-2007, 02:48 PM   #2
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Preferred stocks are a weird beast, you get "almost but not quite" the yield of the corporate bond market, and "almost but not quite" the liquidation preference (all bond holders have superior claim to any equity holders). From what I've seen preferred stocks trade more like bonds but without all the coupon. I guess you can tell I'm not a huge fan.

I would personally be more inclined to invest in either a corporate bond ETF, or a dividend oriented equity ETF, but that's just me.

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Old 08-18-2007, 04:20 AM   #3
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I know virtually nothing about the preferred stock universe.. except that I got a $30,000 check (representing a 7.7% ann'l. return) yesterday after the preferred stock I held in a bank hosed by the Feds during the S&L debacle ("here, take on this other, failing bank and we'll back you up --OOOPS, no we won't!") finally definitively won its breach-of-contract case. The common stockholders got bupkis though they did have the opportunity to sell for 10 cents on the dollar a few years back to a speculator.

So in my case preferred stock was, well.. preferable!!

I don't know what the point of the ETF would be since I'd imagine what's important is more the underlying company than just the naked fact of whether the stock is preferred or not.

Also, there are many flavors of "preference" with differing characteristics.. and it depends on the particular case whether the preferred status is advantageous or detrimental to you tax-wise or otherwise.

Some argue that a straight preferred stock, being a hybrid between a bond and a stock, bears the disadvantages of each of those types of securities without enjoying the advantages of either. Like a bond, a straight preferred does not participate in any future earnings and dividend growth of the company and any resulting growth of the price of the common. But the bond has greater security than the preferred and has a maturity date at which the principal is to be repaid. Like the common, the preferred has less security protection than the bond. But the potential of increases of market price of the common and its dividends paid from future growth of the company is lacking for the preferred.
Advantages of straight preferreds posited by some advisers include higher yields and tax advantages (currently yield some 2% more than 10-year Treasuries, rank ahead of common stock in the case of bankruptcy, dividends are taxable at a maximum 15% rather than at ordinary income rates, as in the case of bond interest).
Preferred stock - Wikipedia, the free encyclopedia

PRO ETF: A Call For a Preferred Stock ETF (PEY, FDL) - Seeking Alpha
CON ETF: Preferred Stock ETF? No Thanks. - Seeking Alpha
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Old 08-18-2007, 08:32 AM   #4
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Have not read the articles, so maybe am saying what they say (or am completely wrong)...

As someone mentioned... they are below bonds and above common in a bankruptcy which is important if you happen to own that company...

They usually pay a bit more than bonds...

There are (to be simple) two major kinds... the ones that look like bonds and the ones that look like common stock... The latter are convertible preferred.. they are preferred with an equity kicker... they will allow you to buy common stock at a given price that is usually much higher than it was when the PS was issued... So, say the common is at $10/shr... they might allow you to buy X shares at $20/shr. Now, you will not buy unless the stock goes above the $20... but if it does, you now have the risks/rewards of the common...

The other just pays dividends and pays off when it is done... not up side to owning them except for the slight increase in income...
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