Almost from the start of the STI Hedge Fund two ETF's have been in the holdings. Both of them pay monthly dividends and if you know me you know how I like monthly dividends. Both of them have never missed a monthly payment and both of them have preformed as I have expected. Currently both of them are also attractively priced in my opinion. The ETF's, JNK and PFF. An ETF, for those not familiar is nothing more than a market traded mutual fund. The difference is that the market decides the price of a ETF during the day's trading versus with a mutual fund the price is set a day's trading end when all the underlying stocks are priced and the mutual daily asset value is set. ETF's have the advantage of high liquidity and can be anytime the market is open.
JNK...Which basically stands for Junk, as in junk bonds, is what is considered a high yield ETF. The ETF has over 200 holdings that are more considered industrial than anything else. Industrial in this case could range from a true industrial business, to a hospital, or a casino operation. These are corporate bonds that are generally not BBB rated or above, even thought the ETF does not some of the higher ones as well. Most are BB and below. However with that said defaults are rare and missed payments on bonds are rare as well. The beauty of this ETF is that risk is spread over so many holdings, even if one or two default the value will not collapse. I also consider high yield corporate bonds as a hedge against inflation as when inflation heats up the underlying companies can raise prices and pay the bonds off easier with cheaper money. Of course you might see some decline in value, but that could be offset with the lessening of risk default. JNK is currently paying around 8.3%, note the monthly payout varies some due to the timing of underlying corporate payments. I also like the low expense ratio of .40% due to the lack of rotation in bond holdings. JNK would make a good selection to diversify your holdings and add some nice yield. One final note, if a bond defaults the holder normally is first in line for assets, so all would not be lost. JNK is currently selling around $37.50 and I believe fair value is around $40. You could have bought JNK at $26 about three years ago.
PFF..Is a preferred stock holding ETF. In this case the majority of the preferred stocks are financial stocks, mostly banks. There are some international holdings as well such as HBSC. Frankly this ETF might be as safe as they come unless you are of the opinion that banks are going out of business. Preferred stocks are a step below bonds on the stack of who gets the assets when companies bankrupt, However again the risk is small that anything in this ETF is going to default. PFF pays out a current yield of about 7.2% and again since the underlying stocks pay on a staggered basis the payout's are not the same each month. The expense ratio is low at .48% as well. PFF is selling around $36 and fair value in my opinion is around $39. You could have bought PFF at $18 about three years ago.
All note that neither of these ETF holdings missed a single payment during the recent financial crisis. Of course as noted you could have bought them much cheaper a few years earlier and be sitting on some nice capital gains as well as much higher invested capital yield.
As noted I currently hold long or as options JNK and PFF.
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