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Why do preferred stocks go down more than Dow Jones stocks?

Why do preferred stocks go down more than Dow Jones stocks?

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December 2018

As a rule, they don't.  I would not expect them to have long term volatility of much more than the corporate bond market.  However, in recent weeks they have been hit hard.  Here is why I think that has happened:

(1)  Index funds have seen redemptions.  The biggest -- iShares (PFF - 34) has seen 49 million shares of redemptions since the end of August.  That's over 10% of its market cap.  As a result the fund has had to sell approximately $1.7 billion of its portfolio, or about 80 million shares.  The market has had a tough time absorbing this volume.  As a result, yields are at post-crisis highs both on an absolute basis and relative to the 10-year Treasury.  I think this is a gigantic buying opportunity.

(2) Bonds in general have declined as a result of rising short-term rates.

(3) At year-end, investors with useful tax losses are harvesting them.

I don't think the decline has anything to do with underlying fundamentals.  As a rule, preferred-stock issuers tend to be clustered on either side of the BBB/BB divide, and you might argue that lower-rated companies ought to pay higher yields.  Granted; but not to this extent.  Remember that many preferreds pay qualified dividends so the yield differential is even greater than it might seem.  If you own a portfolio of preferreds, hang on.  If you have money, buy more.

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