Time to be more selective in US markets

Posted on: May 20, 2011 in: Economic Growth, Preferred Shares, US Equities with 0 comments

iShares S&P US Preferred Stock ( Ticker: PFF )

Wednesday’s comments by the US Federal Reserve offered another indication that we are at least half-way through the current economic cycle. However, this does not mean sell your stocks; it just means be more selective.

In its Minutes released yesterday, the Fed outlined its plans to gradually end its easy money policy. It said that the economy was recovering, albeit not as quickly as it would prefer. On inflation, the Fed said it did not expect high energy and food prices to persist for very long. The net result was that the Fed said it would keep interest rates low for now. It also said that when the time comes, it will stop buying US Treasury Bonds. This would effectively tighten US money supply without actually raising rates. This “neutral, wait-and-see” statement indicates the Fed sees neither a crisis nor an overheating economy – in other words, an economy that, while still weak, is more or less back to normal. Truly, a mid-cycle hallmark.

The timing is also just about right. It has been 26 months since US (and Canadian) markets hit bottom in March 2009. Economic cycles typically last 48 to 60 months. Over the last 26 months, the S&P 500 has climbed 68% to about 1340, stunning until you look up at the 1558 peak it fell from. Over the next 12 months, given the stage of the cycle, we’d expect returns to be closer to historic norms.

We also expect that quality blue-chip and dividend-paying stocks will outperform. In December, we began shifting the US equity portion of our portfolios into the iShares S&P 100 ETF (OEF). OEF holds the largest US companies with strong balance sheets and global revenue bases.

We would also like to add a US blue-chip ETF with a better dividend yield to add to the portfolio. In our search, we took a closer look at the iShares S&P Preferred Fund (PFF). With a yield of 7.2% it looks tempting. But we find it is too concentrated. 85% of it is invested in big banks like Citi, Deutsche, Bank of America – a group that is still working through issues. And while its total holdings are listed at 245, many of those are different share classes from the same issuer. Unique issuers total 92, of which the top ten – all banks but for one utility – account for 50% of the fund.

There are other US ETFs in this category available. We’ll take a look at one of those next week.

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archerETF Metrix PFF
Category US Equity
Benchmark S&P US Preferred Index
Total Holdings 245 (92 entities)
52 Week High $40.11
Recent Price $40.09
52 Week Low $32.51
Avg Daily Volume 1.33 Million Shrs
Avg Daily Volume ($) $53.35 Million
Total Market Cap $7.66 Billion
ETF Annual Fee 0.48%
ETF Trading Currency USD
ETF FX Exposure USD
Annual Volatility 30.9%
Correlation to S&P 500 60.3%
Return to Risk Ratio Not Available
Use of Leverage No
Use of Futures No
6 month Return 4.73%
1 Year Return 20.25%
2 Year Return 52.49%
3 Year Return 12.83%
Dividend Yield (TTM) 7.18%

The archerETF Global Tactical Portfolio

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archerETF offers Global Tactical Portfolio Management.

Our outlook is Global: we invest across countries, sectors, commodities and other asset classes to improve returns. Our management is Tactical: we strive to select the right opportunities at the right times in response to changing market conditions to manage and minimize portfolio risk.

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© 2011 archerETF Portfolio Management is a division of Bellwether Investment Management, a discretionary portfolio manager registered with the Ontario Securities Commission. This report is provided for information only and does not constitute investment advice. While we believe the information to be accurate and timely, we make no claim or warranty to that effect. Please seek professional advice before making any investment decision. We may hold positions in any or all securities discussed in this report.

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