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Why Income Investors Should Not Ignore Preferred Stock ETFs

Preferred stocks have been quite popular among income-seeking investors due to their juicy yields but many now wonder how these securities will perform in a rising rate scenario. We believe that there is still a case for investing in these securities. What are Preferred Stocks? Preferred stocks are hybrid securities that have characteristics of both debt and equity. They have a higher claim on assets and earnings than common stock. Preferred stocks are either perpetual (without any maturity date) or have long-term maturity (30 to 50 years). Like bonds, preferred stocks are usually rated by rating agencies. Most preferred dividends have the same tax advantage that the common stock dividends currently have. However, while companies have the obligation to pay interest on the bonds that they issue, dividends on preferred stock can be suspended or deferred by the vote of the board. Why Should You Invest in Preferred Stocks? Juicy yields around 5-6% are the main attraction for investors. Further, preferred stocks have low correlations with common stocks and hence add diversification to a stock-centric portfolio. Further, these securities have much lower volatility than stocks and provide stability to portfolios. Risks Like bonds, preferred securities are sensitive to changes in the interest rates. In the event of rising interest rate, the value of these securities will fall. But I believe that in the current scenario, when interest rates are expected to stay “lower for longer,” the impact will be minimal. Preferred securities also face credit risk as the issuer may not be able to meet the claims of investors. However, both the ETFs that we have discussed below have minimal exposure to energy sector, where chances of default are higher. Many preferred securities have call provision, i.e. the issuer has the right to redeem its preferred stock or convert it to common stock, but call is usually exercised by issuers when interest rates are falling. ETFs to Consider iShares S&P U.S. Preferred Stock Index (NYSEARCA: PFF ) is the most popular and liquid preferred stock ETF in the space. It has a lot of exposure to banks and other financials, which are expected to do well in rising rate scenario. PowerShares Variable Rate Preferred Portfolio Fund (NYSEARCA: VRP ) holds variable- and floating-rate preferred stocks which reduces interest rate risk. Thus, VRP could be a nice option for income-seeking investors in the rising rate scenario. To learn more, please watch the short video below: Original Post

The Recent Insider Selling Tells You Zip. Insider Buying Says Much More

In the ongoing debate about whether stocks are cheap or too expensive, the bears got some assurance from news that insider selling is on the rise. Investors often watch what insiders do because insiders are supposed to be better informed about their companies than the rest of us. So if insiders are selling, it must be because they know stocks are overvalued. Right? Not necessarily. I’m in the camp that believes stocks in general are too expensive right now. I would not be surprised to see another round of insider selling in the near future. Yet insider selling activity has no bearing on my view. On the contrary, I believe insider selling tells us very little about overvaluation. That’s because there are so many reasons why insiders might sell stock. A conviction that the stock is overvalued is only one possibility. Insiders might sell stock simply to raise cash. After all, insiders sometimes receive a relatively large proportion of their total compensation in the form of stock or options. Actual cash might make up a smaller proportion. So if these insiders want to buy a new home or send their kids to college, they might sell stock to raise cash. Insiders might also sell stock to diversify. It’s simply too risky for anyone to have all of their labor and most of their wealth tied up in just one company. It makes perfect sense for insiders to sell stock every once in a while to spread their wealth into other assets. Here’s yet one more reason why insiders might sell. Many employees are compensated at least in part with stock options. As a result, they can get hit with a tax liability when they exercise their options. They might sell some of the stock they received from exercising the options just to pay Uncle Sam. That’s not to say that a sudden spike in the amount of insider selling couldn’t be something to worry about. However, knowing that there are so many reasons why insiders might sell, I have to conclude that insider selling activity is not a useful signal of a market top. Insider buying is another story entirely. There are many reasons why insiders might sell, but there is only one major reason why insiders would buy. They buy because they believe the stock is undervalued. It’s true that a new member of the board of directors might be encouraged to buy some stock just for appearance’s sake, but that’s an exception to the rule. If insiders are using their own cash to buy stock, that a bullish signal. This just happened at one of the companies on my Bottom Line’s Money Masters recommended stock list. This company recently announced quarterly earnings that fell short of expectations. As often happens in such cases, the stock sold off in response. Yet my analysis convinced me that this stock is extremely undervalued. Apparently, several insiders agree. At least five of them purchased shares following the selloff. The CEO bought the most, spending $185,000 of his own money. That might not seem like a lot, but he didn’t acquire the stock as a result of an employee ownership plan or the exercise of options. He made a direct purchase on the open market using real cash. This CEO already owned a large stake in the company. The fact that he is willing to add to that stake should send a clear signal to other shareholders that the guy running the company is convinced the stock is cheap – so convinced that he is putting his money where his mouth is.

October 2015 U.S. Fund Flows Summary

By Tom Roseen For the first month in three investors were net purchasers of fund assets, injecting $44.8 billion (the largest net inflows since August 2014) into the conventional funds business (excluding ETFs) for October. However, for the fourth consecutive month stock & mixed-asset funds suffered net redemptions, handing back some $5.7 billion for October, while for the first month in five fund investors were net purchasers of fixed income funds, adding $4.3 billion to the macro-group for October. And for the fifth month in six, money market funds witnessed net inflows, taking in $46.3 billion. Despite a weaker-than-expected jobs report at the beginning of October, mixed economic data throughout the month, and a roller-coaster ride of corporate earnings reports, volatility remained below the long-term average of 20. Investors appeared to shrug off a disappointing nonfarm payrolls report that showed the U.S. had added a lower-than-expected 142,000 jobs for September as some investors began to believe the Federal Open Market Committee would not raise interest rates this year. A surprise cut in interest rates by the Peoples Bank of China (PBOC), better-than expected earnings reports from a few heavyweight tech firms, and hints from the European Central Bank (ECB) that further easing might be in the cards pushed stocks to a fourth consecutive week of plus-side performance and sent some investors into risker assets for the month, while others were content to pad the coffers of money market funds in a wait-and-see approach to investing. The Mixed-Asset Funds macro-classification (+$3.4 billion) attracted the strongest net inflows of Lipper’s five equity macro-classifications, while USDE funds experienced the largest outflows (-$8.5 billion). Large-cap funds (-$5.3 billion) suffered the largest monthly net redemptions of the capitalization groupings for the third consecutive month. In contrast, the ETF universe witnessed its ninth consecutive month of net inflows, taking in $28.3 billion for October (its largest net inflows since February 2015). For the second month in a row authorized participants (APs) were net purchasers of equity ETFs-injecting $16.3 billion, and for the fourth month in a row they were net purchasers of bond ETFs-injecting $12.0 billion for October (their largest net inflows since February). In response to the easy-money news from the PBOC and ECB, for the first month in four APs’ appetite for World Equity ETFs topped that for all other types of equity ETFs. The macro-classification witnessed the strongest net inflows (+$6.4 billion) of Lipper’s five equity-related macro-classifications, followed by Sector Equity ETFs (+$5.9 billion), USDE ETFs (+$4.0 billion), and Alternatives ETFs (+$0.1 billion). The Mixed-Asset ETFs macro-classification (-$0.1 billion) suffered the only net outflows for the month. If you’d like to read the entire October 2015 FundFlows Insight Report with all its tables and charts, please click here .