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Preferred Stock ETFs, High Yield Bond ETFs: Are They Flashing Signs Of Increased Risk-Taking?

24 May 2010 at 11:27 am by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

The “euro-dollar” sits near a four-year low.¬†Perhaps that’s good for European exporters, but few seem to think broad regional European stocks are worth the risk.

China’s willingness to curb double-digit GDP to slow above-trend inflation and excessive housing speculation makes long-term sense. Short-term, though, equities may struggle during the tightening process. Moreover, resource-rich countries that serve China’s demand must¬†contend with that slower growth.

Due to these factors, as well as resilience in corporate America, many seemed to¬†view the U.S. as the smart stock trade. Until May… that is.

At present, the S&P 500 is roughly 11% lower than its April 23 highs of 1217. Riskier stock and commodity assets have been set aside.

The stock drop has been covered with enormous vigor. And why not? It’s where our emotions typically collide with Wall Street.

Yet what if investor appetite for risk were popping up in places that receive less attention? Indeed, it appears that investors may be in the process of considering different ways to produce cash flow.

Consider the following price action. As the Dow and the S&P 500 struggle for direction on yet another manic Monday (5/24/10), the iShares High Yield Bond Fund (HYG) quietly accumulated follow-through gains from the previous trading session.

HYF Versus SPY 10 Day

Equally worth noting,¬†HYG appears to be setting a different tone with its direction over the last 3 days; it’s ticking higher. In contrast, the S&P 500 price movement, while not necessarily revisiting Thursday’s (5/20/10) frantic lows, hasn’t¬†showed up with¬†conviction.

Ironically, perhaps, the iShares S&P Preferred Fund (PFF) depicts a very similar 10-day price pattern as HYG:

PFF Versus SPY 10 Day

The reason may be as simple as a dependable income stream, with a possibility of some capital appreciation should the correction remain contained. The iShares High Yield Bond Fund (HYG) serves up an annual distribution yield near 9.2% and the income arrives in monthly payouts. The iShares S&P Preferred Fund (PFF) offers a distribution yield near 7% and the income arrives monthly as well.

You can listen to the¬†ETF Expert Radio¬†Show¬†‚ÄúLIVE‚ÄĚ,¬†via podcast or on your iPod.¬†You can review more ETF Expert features here.

Disclosure Statement: ETF Expert¬†is a web log (‚ÄĚblog‚ÄĚ) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above.¬†The company receives advertising compensation¬†from Invesco PowerShares Capital Management, LLC and Geary Advisors, LLC. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. Investors who are interested in money management services may visit the Pacific Park Financial, Inc.¬†web site.

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