How We Track What Smart Money Is Buying

This is an extract from an earlier article at Systematic Income Premium

We received a question from a subscriber recently of why we track the holdings of the First Trust Preferred Securities and Income ETF (FPE) in our service Preferreds Tool. A screenshot of retail preferred holdings by the fund is shown below, sorted by weight.

Systematic Income Preferreds Tool

The answer is three-fold. FPE is an actively-managed fund so its managers hold only those securities they like rather than a broad-based index. Two, its performance has been pretty good – the fund has outperformed the average sector mutual fund and passively-managed preferred ETFs by close to 1% per annum over the last 5 years. It has even outperformed some sector CEFs despite having no leverage. And three, unlike CEF holding disclosures, FPE provides its holdings with only a day’s delay.

Out of its current retail holdings (the fund also holds institutional preferreds), the following are worth highlighting.

The somewhat unusual $1,000-“par” bank preferreds WFC.PL and BAC.PL make up a large allocation in the fund of 2.6% in total – more than 1% above an average preferred weight. Investors who follow the preferred market are familiar with these non-callable preferreds which tend to trade at the upper range of the WFC and BAC preferred suites in yield terms.

However, because they are not callable, they are even more attractive to investors than their yields imply because the issuer cannot call them away in case preferred yields collapse, unlike the rest of their preferreds. In short, unlike the rest of the market their upside is not capped.

The two stocks are convertible however the conversion strike is relatively remote for WFC, at least. The two stocks also trade at prices where the conversion will actually benefit holders in the very unlikely event it happens soon. WFC.PL trades at a 6.4% yield while BAC.PL trades at a 6.2% yield. We prefer WFC.PL of the two as does the fund apparently.

The fund also holds all four Brookfield Property Partners K-1 preferreds. Its largest holding is the 6.25% Series 1 due 2081 (BPYPM) trading at a 7.5% yield. BPYPO currently offers a higher yield of 8.1% and is our pick in the suite.

FPE also holds a number of Southern California Edison preferreds which are relatively high-quality in the context of the non-bank preferred space. Its largest holding is the SCE 5.45% (SCE.PK) a Fix/Float preferred which has held in relatively well this year. It trades at a 6.2% stripped yield and a 7.7% reset yield based on its first call date in 2026.

We are also not surprised the fund holds two near-term reset securities – the mortgage REIT pair NLY 6.95% Series F (NLY.PF) and the AGNC 7% Series C (AGNCN). Both convert to a floating-rate coupon around October of this year at which point their yields (based on today’s price) will rise well above 8.5% due to the expectation of Libor over the coming months. Over the longer-term Libor is expected to move to around 3% at which point the yields of these securities will be around 8.2-8.4%. These yields are not only attractive in our view but are also well above the other AGNC and NLY preferred yields.

Thanks for reading.

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