It sure feels like something broke. Have you seen the last three weeks for the Shares Preferred and Income Securities ETF (PFF)? By my math, shares are still slightly up on the month. 

• Shares ended September at $33.23.
• They are down $.10, to $33.13.
• However, they also went ex-dividend for $.165 on October 1st, 2024. That is a positive total return of $.065.

Therefore, the total return month-to-date is actually positive. That seems absurd, given the swing in Treasury rates. The 10-year Treasury yield is up 44.7 basis points since the end of September. 

Despite higher Treasury rates, the return on the preferred share ETF is positive? Many of those shares are fixed-rate shares and they don’t have particularly high yields. When Treasury rates jump by 25 basis points, it should put some pressure on the price. By 44 basis points, the impact should be significant.

Yet here we are. PFF is up slightly year-to-date. Investors in PFF are getting basically the same yield at the same price, even though Treasury yields moved up significantly. For reference, the dividend yield on PFF is extremely close to 6%. Here’s the comparison:

• The spread between the yields at the end of September was about: 6% - 3.781% = 2.26%.
• Today, the spread has declined to about: 6% - 4.191% = 1.81%.

Where’s the reward for taking on that additional risk?

I think the risk/reward for the ETF looks poor today. The spread is remarkably low. Even junk bonds have a much better spread over Treasuries than 1.81%. 

Disclosure: No position in PFF

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