PFFD Dividend ETF

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Cortopassi
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PFFD Dividend ETF

Post by Cortopassi » Thu Jan 06, 2022 10:58 pm

Wondering on anyone's thoughts on ETFs like PFFD, currently 5.03% yield, https://finance.yahoo.com/quote/PFFD?p= ... c=fin-srch

Amazingly stable, other than a sharp drop in Mar 2020.

0.23 expense ratio.

There are others I am looking at, PGX, SPFF, DIV, SDIV (others??)

I've said a few times here, if I could get 5% in a money market, I'd have a ton of money, if not all, in it.

Tell me why you would or would not, take some % of whatever your net worth is, esp. if you are high net worth, and dump it in here and collect the income? What am I missing?
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Re: PFFD Dividend ETF

Post by mathjak107 » Fri Jan 07, 2022 3:52 am

That fund is very risky …it is mostly Lower quality bonds but what they hold is the riskiest level

It is more risky than a junk bond fund ….

More than half the fund is mostly BBB WHICH IS THE LAST RUNG IN INVESTMENT GRADE bonds .

That means one slip in credit worthiness and all pension funds , insurance companies and funds that can hold only investment grade bonds will have to dump them in mass ..it will be a blood bath .BBB is considered the most dangerous credit worthiness level because of that one notch above junk ..the rest of the fund is in the junk range

At least junk bonds are not in that situation since they are already not in the position of having to be dumped ..

This fund can blow up on you in a slow down
Last edited by mathjak107 on Fri Jan 07, 2022 4:05 am, edited 1 time in total.
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Re: PFFD Dividend ETF

Post by D1984 » Fri Jan 07, 2022 4:05 am

Cortopassi wrote:
Thu Jan 06, 2022 10:58 pm
Wondering on anyone's thoughts on ETFs like PFFD, currently 5.03% yield, https://finance.yahoo.com/quote/PFFD?p= ... c=fin-srch

Amazingly stable, other than a sharp drop in Mar 2020.

0.23 expense ratio.

There are others I am looking at, PGX, SPFF, DIV, SDIV (others??)

I've said a few times here, if I could get 5% in a money market, I'd have a ton of money, if not all, in it.

Tell me why you would or would not, take some % of whatever your net worth is, esp. if you are high net worth, and dump it in here and collect the income? What am I missing?
Preferreds aren't a bad investment per se; they are between stocks and bonds in risk (and generally in return as well, at least over the long term) so if that's what you want, have at it.

They are NOT, however, anything close to a substitute for a money market account!

Just by way of example:

1. Between mid-2007 and 2-28-2009 Morningstar's "US preferred stock mutual fund" category started at a value of 21.2388 (in April of 2007) and reached its nadir in late Feb 2009 at a value of 11.01; keep in mind that this is a total return index type of series (i.e. it includes reinvested dividends as well); this comes out to a peak-to-trough loss of 48.16%! The actual peak-to-trough loss on a truly daily (rather than end-of-month to end-of-month which as above....which will miss the absolute bottom unless it happens to exactly correspond with the month's end by sheer coincidence) basis for this index was even worse; it reached a nadir of 9.17 on March 9th, 2009; this was a loss from the peak of 56.8%.

2. Lest you not have access to Morningstar's category returns; you can see a similar result for the US Preferred Stock ETF from spring 2007 to the bottom in 2009; here it is: https://www.portfoliovisualizer.com/bac ... ion1_1=100

An over 56% loss. FWIW some of the actively managed preferred CEFs were even scarier; https://www.portfoliovisualizer.com/bac ... n8_2=16.66 shows max drawdowns of upwards of 60% (or 65% in some cases). Ouch. That hurts.

Finally, just as a kind of graphical whammy to really bring it home; here is Invesco's preferred stock ETF from the start of 2008 to early 2009: Image


3. The Winans U.S. Preferred Stock Index (the TR version; a chart is available at https://thumbor.forbes.com/thumbor/960x ... it%3Dscale ) is an index of US preferred stocks that goes back upwards of a hundred years. If you go to the chart at the link above you will see that said index returned virtually nothing in nominal terms between 1965 and roughly 1979 or 1980 as gains from reinvestment of the dividends were offset by a shrinking share price (caused by ever-rising interest rates). The overall value went up and down and it fluctuated but the bottom line is your investment wasn't worth much more if anything (in nominal terms) than when you started fifteen years earlier. This is even worse than it looks because prices during this time period were up approximately 2.5 times; that means that even if your investment was still worth the same nominal amount it was in 1965 it would by late 1979 or very early 1980 only buy (in REAL terms i.e. inflation-adjusted purchasing power terms) 40% of what it would've bought in 1965.

I checked to be sure that this was indeed the TR index (since the above result seemed pretty grim and I wanted to make absolutely sure I wasn't accidentally looking at a price-only index and thus understating returns by not including reinvested dividends) and so I compared it to the PR (price-only...i.e. not counting reinvested dividends) index at https://ibb.co/QYxvHHX (actual image is at https://i.ibb.co/nQKM11R/Winans-US-Pref ... e-only.png ) and the PR index actually shows a huge DECLINE in nominal value from 1965 to 1980! Yeah, the results from 1965 to 1980 are indeed as bad as I thought....the TR index shows a loss of around 60% of your real inflation-adjusted wealth and the price-only index lost almost 2/3rds of its value just in nominal terms (which in real terms would be just too awful to contemplate given that this was the high inflation 1970s period).

4. Standard & Poor's has a preferred stock index going back to 1910 or thereabouts; monthly values for it are given in the Federal Reserve's Banking and Monetary Statistics books for 1914-1941 and 1941-1970. It is a price only index but they do provide quarterly and monthly preferred stock index dividend yields; as such, a true total return index can be created from these two components if one desires.

Given that this period covers the Great Depression I figured I'd see how preferred stocks did during the early 1930s all the way to the bottom in mid-1932. The result? From its height in early 1931 at a value of 145 it was almost a straight shot down to 101.8 in June of 1932. This is a loss of around 30%. This IS a price-only index so to be fair I went and added in reinvested dividends over this period; they would've added around 6.9% to the final result for a loss of just under 23% over this period. This is a much better return of this period than, say, stocks or junk bonds would've provided but MUCH worse than either cash, T-bills, STTs, ITTs, LTTs, or for that matter short, intermediate, or long-term investment grade corporate bonds.

The bottom line of all of the above? Preferreds are not and never will be a safe partial replacement for a money market; their high yields come with far higher risk than any money market fund. That risk may or may not materialize in the time you own them but if you aren't willing (and financially able) to risk a 25, 30, 50, 60, or even 65 percent drop over a year or two (or even several years if the decline takes that long to finally bottom out) you should stay out of preferreds. Don't let the (relatively) small and mild drop and quick recovery in 2020 fool you; that was not typical in any way of a real bear market in preferred stocks!

If you are willing to take the risk in return for that 5% yield then please only do so with your eyes open as to what could happen; if not you could be in for a world of hurt the next time we have a real crash!
Last edited by D1984 on Fri Jan 07, 2022 4:11 am, edited 2 times in total.
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Re: PFFD Dividend ETF

Post by mathjak107 » Fri Jan 07, 2022 4:06 am

This is not a storyline about preferred stock …this is a story line about being mostly BBB LEVEL which is very dangerous.

It is the last level of investment grade …one slip in credit has that level no longer able to be held by any institution or fund that has to stay in investment grade.

It will be a bloodbath if we head towards recession
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Re: PFFD Dividend ETF

Post by Cortopassi » Fri Jan 07, 2022 6:25 am

Thanks for the eye openers!
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Re: PFFD Dividend ETF

Post by dualstow » Fri Jan 07, 2022 6:49 am

I think you could do worse. 5 stars from Morningstar and “Below Average Risk Vs Category.”
i checked Bogleheads and saw an early 2018 thread mentioning that Rick Ferri has a short term bond fund and the rest of his fixed income in PFFD.
(june 2019 post) https://www.bogleheads.org/forum/viewtopic.php?t=238048
(Don’t know if it’s accurate or still true). Plenty of bogleheads own it.

The only thing that gives me pause is that you invoked a money market fund. 5 stars or no, with 55% in BBB and 32% in BB, you really could lose big before a money market even got close to “breaking the buck.”

Also, taxes…

Further down in the thread mentioned above, nisiprius writes,


One big knock on preferred stock is that it's no longer issued by most companies. In the 1950s, say, most companies issued
both common and preferred stocks. Nowadays, it is a kind of specialty thing and is almost entirely issued by financial companies. So you have a diversification problem, because investing in preferred stocks amounts to putting most of your eggs in one out of the eleven business sector baskets.

Christine Benz comments that "Moreover, preferreds are invariably issued by heavily leveraged companies, meaning they can skid in value amid a weakening economic environment."
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Re: PFFD Dividend ETF

Post by mathjak107 » Fri Jan 07, 2022 8:06 am

One of the things charts don’t tell you like the above is the fund makeup …

In this case case BBB IS a very dangerous spot to be in .

The problem is it is now the sweet spot so to speak …it is the highest yielding of investment grade and the most sought after by funds and institutions….

But it is so risky be cause one slip and it is no longer investment grade and once dumped in mass with few buyers it can be the equivalent of 2008 junk paper
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Re: PFFD Dividend ETF

Post by Cortopassi » Fri Jan 07, 2022 8:44 am

I used money market as a comparison on the yield, not on the safety, sorry.

If I were to invest in something like PFFD, it would replace a percentage of my VTI holdings, not my cash.

But...you guys did a pretty good job of scaring me away from this! Thanks.
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Re: PFFD Dividend ETF

Post by mathjak107 » Fri Jan 07, 2022 8:49 am

Again , for that. Risk level i would sooner turn to hyg or sphix which I do own ….

They have a cushion of interest they spin off and they are not held by those who are restricted from non investment grade stuff .

my high yield stuff is a lower volatility proxy for having more equities ….. it fills the gap in as it acts more like stocks then bonds .

I am adding to my sphix position today.

They only hold lower than investment grade so a sell of. By funds and instructions restricted are not a problem
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Re: PFFD Dividend ETF

Post by dualstow » Fri Jan 07, 2022 1:33 pm

Guys, can we pick this one apart now?

As Dividends Get Cut, ETF Offers Steady 7% Annual Distribution Rate
The ticker is HNDL
Everyone wants yield, but they're stuck in a zero yield environment.

And the place investors have found yield - dividend stocks — has become a mine field with companies announcing dividend cuts nearly every day, reducing payouts and yield.

However, one ETF seeks to pay a consistent annual distribution rate of 7% the fund's net asset value come rain or shine. The StrategyShares Nasdaq 7Handl Index ETF (HNDL) HNDL -0.2% is the only fund that commits to a 7% yield.
https://www.forbes.com/sites/lcarrel/20 ... tion-rate/
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Re: PFFD Dividend ETF

Post by mathjak107 » Fri Jan 07, 2022 2:03 pm

Interesting mix ….

You have to be careful though with funds that commit to distributions..

I owned a reit like that …in tough times they borrowed the money that was paid out to make up the shortfall or they used the money earmarked to buy more assets with
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Re: PFFD Dividend ETF

Post by dualstow » Fri Jan 07, 2022 2:13 pm

Did you hold the REIT for a long time?

This fund, HNDL, hasn’t been around for very long. Not time tested. Huge expense ratio.
And yet, 7% (drool)
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Re: PFFD Dividend ETF

Post by mathjak107 » Fri Jan 07, 2022 2:28 pm

But that doesn’t mean the actual return is 7% …it needs to appreciate in value ar least as much in share price to have a 7% distribution to be a 7% total return
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Re: PFFD Dividend ETF

Post by Xan » Fri Jan 07, 2022 2:38 pm

mathjak107 wrote:
Fri Jan 07, 2022 2:28 pm
But that doesn’t mean the actual return is 7% …it needs to appreciate in value ar least as much in share price to have a 7% distribution to be a 7% total return
Right, that's how they pay the dividend, by selling assets as needed.
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Re: PFFD Dividend ETF

Post by mathjak107 » Fri Jan 07, 2022 2:56 pm

With the reit their 6% payouts had about a 3% total return
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