ETF Expert

Two weeks earlier, the U.S. stock market (S&P 500) sat near 1340. By the close of Monday’s bell, the market finished at 1119… a startling -16.5% breakdown.

Perhaps more shocking, however, was the indiscriminate selling of several long-time, non-volatile income producers. For example, in the same period, iShares S&P Preferred (PFF) tumbled -14.1%. Considering the fact that preferred shares are typically less volatile and less risky than common stock, the losses caught most investors by surprise.

Similarly, energy pipeline enthusiasts are used to seeing their assets create a reliable income stream that’s similar to preferred shares. Over the same 2-week period, exchange-traded products from JP Morgan Alerian MLP (AMJ) to Credit Suisse Cushing MLP (MLPN) plummeted -13.8% and -13.7% respectively.

The reasons may be multi-faceted, though not inherently complex. Reason numero uno? Many sought to take profits on long-time winners from the bull market. Preferred ETFs like PFF and MLP vehicles like AMJ were among some of the most reliable winners since March of 2009.

A second reason for the damage? The S&P credit downgrade to U.S. treasuries. While treasury bonds themselves may not have been hurt in the confusion, the credit worthiness of every asset along the yield spectrum came under fire. In other words, if preferreds or MLPs can produce roughly 6% annualized, the higher yields might eventually be riskier compared with an eventual jump in the yields of downgraded “risk-free treasuries.”

The third component is specific to the asset types themselves. For instance, iShares S&P Preferred has 75% exposure to the financial sector. With major banks coming under enormous scrutiny for their balance sheets/exposure — with institutions like Bank of America free-falling -20% in the day – 2008 fears crept back into the investor mindset.

On the energy pipeline side of the coin, crude oil has hit its own personal bear market. Granted, energy pipeline partnerships are less sensitive to oil price speculation, and far more sensitive to genuine supply and demand needs across the U.S., the possibility of a sharp pullback in consumption may hit earnings/dividend sustainability.

That was yesterday… this is today. And on Tuesday, 8/9/11, many of the best performing ETFs are the high yielders. At least as I type mid-day, a table of some of the sharpest rebounders include PFF, AMJ and MLPN.

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