ETF Expert

I get a fair amount of e-mails here at the ETF Expert site. And, on average, the bulk of inquiries concern exchange-traded investments that might be considered… "somewhat speculative."

For instance… what do I think of Malaysia? (See my editorial from a few days back.) Would I buy or sell agribusiness? (Sell it high, buy it lower… when possible.)

Yet sometimes, I get questions regarding lower-risk alternatives. Or at least, "lower risk" at first glance.

For example, a reader wanted to know if the iShares S&P U.S. Preferred Stock Index (PFF) might be ripe for the purchasing. He was intrigued by an online quote of a 20% dividend.

There was more.

The iShares S&P U.S. Preferred Stock Index (PFF) had been languishing near 52-week lows of 41 — a 15%+ decline from its peak price of 50. In addition, with the possibility that financials had hit bottom, PFF’s 3/4 weighting in financials could contribute to capital appreciation.

Having just recovered from the flu, I wasn’t familiar with a 20% dividend on any preferred stock index. My mind could only recollect the 7% yield on the PowerShares Financial Preferred Fund (PGF).

So… an investigation was in order.

The iShares S&P U.S. Preferred Stock Index (PFF) had served up a special year-end distribution that had thrown off the reported yield on a number of financial web sites. However, the accurate number is closer to the SEC’s 30-day yield of 9.2%.

Nevertheless, a 9.2% dividend is nothing to sneeze at! Nor is a 7% yield. In fact, we’re talking about baskets of preferred stocks that have already experienced bearish results in the sub-prime crisis. Is there a whole lotta downside risk left?

The questions to answer are these: (1) Has the financial segment come close to bottoming out? (2) Will the financial segment be at least at the same place at he end of 2008 as it is today?

If one is inclined to answer, "Yes," then one would have to take a serious look at the PowerShares Financial Preferred Fund (PGF) and the iShares S&P U.S. Preferred Stock Index (PFF).

Think about it. If common stocks of financial companies sank another 20% in 2008, these indexes might fall 8%-10%. The yield alone would offset the capital depreciation. In contrast, if common financial stocks went flat on the year, the preferred indexes would produce a steady monthly income stream. And, should financial stocks lead the pack in 2008 — a distinct possibility with the rate-cutting activity — preferred indexes could garner venerable capital appreciation as well as an attractive yield.

A reasonable buy? Yes, I think that it is.

Downside risk? The markets could enter a bear, and all of the Fed stimulus/Congressional stimulus/foreign country stimulus fails. (And the financial system derails entirely.) I doubt that.

I think that there’s been a great deal of pain already. By reeling in some of the preferreds, the risk-reward relationship is quite reasonable. I feel a similar sense of opportunity when it comes to the Dow Jones Dividend Index (DVY).

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.