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Profiting from Preferred-Stock ETFs and High-Yield Bond Funds

Pullbacks in ETFs representing preferred stocks may hint at early stages of a deeper correction

by 3/16/2012 8:15:51 AM
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Offering investors a more secure slice of the equity pie than the average stock, preferred shares and exchange traded funds (ETFs) consisting of preferred securities were one of the big things to come out of the financial crisis of 2008. Now a regular staple of the stock market rotation for a growing variety of traders and investors, these markets have provided a number of short-term opportunities to take advantage of weakness in otherwise healthy markets.

Of late, a pullback in the iShares S&P US Preferred Stock Index Fund ETF (PFF) in the first few days of March took the fund into short-term oversold territory for two consecutive sessions. Buyers responded by bidding PFF higher for five days in a row. Similar corrections and snap-back rallies took place simultaneously in the PowerShares Preferred Portfolio ETF (PGX) and the PowerShares Financial Preferred Portfolio Fund (PGF).

Heading into the final trading day of the week, all three of these ETFs noted above have retreated to technically oversold territory once again, closing lower for a second day in a row after rallying to new six-month highs.

Not as oversold as the preferred shares funds, high-yield corporate bond ETFs have started to sell off, and could end up in technically oversold territory in the next few days. Both the iShares iBoxx High Yield Corporate Bond Fund (HYG) and the SPDR Barclays Capital High Yield Bond ETF (JNK) have finished modestly lower ahead of trading on Friday, trading in neutral territory above the 200-day moving average.

Like the preferred shares mentioned above, HYG and JNK pulled back early in the first half of March, setting up oversold conditions that led to rallies that took the funds higher for five days in a row and four out of five days, respectively.

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David Penn is Editor in Chief of

Disclaimer: The views represented in this column are those of the individual authors only, and do not necessarily represent the views of Schaeffer's Investment Research.


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