JPIE - PFF: Financials Preferred Shares Are Now Stretched (Rating Downgrade)

2024-02-01 02:30:36 ET

Summary

• The iShares Preferred and Income Securities ETF is a fixed income ETF focused on financials preferred equity.
• Financials common equity and preferred shares have rallied significantly in the past months, on the back of an easing in macro financial conditions.
• PFF has a 6.4% yield on a 12-month trailing basis, and 6.6% on a 30-day SEC yield basis, which are beginning to look stretched from a risk/reward perspective.
• The upcoming expiration of the Bank Term Funding Program in March 2024 is highlighted as a potential risk, as it removes one of the current liquidity backstops.
• The thesis points out that other investment opportunities with similar yields may offer better risk/reward profiles. Examples include JPMorgan Income ETF and iShares Floating Rate Bond ETF.

Thesis

We first started covering the iShares Preferred and Income Securities ETF ( PFF ) back in March 2023 during the regional banking crisis. At the time we had several investment grade institutions go into receivership in a matter of weeks, which prompted an intervention by regulators and the creation of the Bank Term Funding Program to provide funding for available-for-sale and held-to-maturity assets....

For further details see: