Friday, July 18, 2008

Preferred Stocks: Anything But Dull

I had to smile when I came across this 2002 article from Forbes titled "Dull is Good: Preferred Stocks". As the charts for two preferred stock ETFs above depict, preferred stocks have been anything but dull in recent weeks.

The reason for this, as Index Universe points out, is that the majority of preferred shares are issued by companies in the financial sector. As the banks and other financial issues have cratered and then bounced sharply higher, their preferred shares have followed suit. The charts for PFF (PowerShares Financial Preferred Portfolio ETF; top chart) and PGF (iShares S&P U.S. Preferred Stock Index Fund ETF; bottom chart) show a considerable volume spike in recent sessions, as investors have questioned the viability of banks and worried about associated risks of default.

Among the top holdings for PFF are preferred shares in Ford Motor, Citigroup, Countrywide, and J.P. Morgan Chase. Among top holdings for PGF are preferred shares in Barclays, Citigroup, Credit Suisse, Merrill Lynch, and Wachovia. If investors thought those preferred dividends were secure, we'd see a lot less volatility in those shares than in the common stock. When preferred shares fall 25% in a matter of days, we're either seeing the buying opportunity of a lifetime or an efficient market pricing in worse things to come for these companies.