Tuesday, June 25, 2013

Where did all the gains go? High-yield and preferred stock 2013 profits go up in smoke!

Many investors flocked to the high-yield bond and preferred stock ETFs during the past year and saw strong returns. In May, Federal Reserve Chairman Ben Bernanke gave a warning to these investors. He said the Fed was keeping close tabs on signs investors were taking on more risk to generate income with interest rates so low.

“In light of the current low interest rate environment, we are watching particularly closely for instances of ‘reaching for yield’ and other forms of excessive risk-taking, which may affect asset prices and their relationships with fundamentals,” Bernanke said.  Since that statement, the funds have seen their year-to-date gains wiped out - and more.

For example, SPDR Barclays High Yield Bond ETF (NYSE: JNK) is off 2.5% so far in 2013 and iShares U.S. Preferred Stock ETF (NYSE: PFF) is down 1.8%. The recent sell-off as Treasury yields surge has resulted in losses of about 6% over the past month for both funds. [Check out the charts below].

Stretching for yield is dangerous. With yields on the 10-year Treasury bond up about 100 bps in the past two months, bond investors in higher risk products such as the PFF, the preferred share ETF (currently paying a 30-day SEC yield of 5.3%) and JNK, the high-yield fund (paying 5.6%) have been clobbered.

They can't say they weren't warned...


SPDR Barclays High Yield Bond ETF

iShares U.S. Preferred Stock ETF