What do you think about PFF and JNK for income risks?

[john47]

Do these two ETFs appeal to income investors risk in price vs monthly dividends?

[markfriedenthal]

Both are good choices for income producing investments. HOWEVER...it is imperative that you recognize the high beta and correlation to the stock market as a whole. In what may be a sideways market (prolonged recovery) these may be great alternatives to the s&p500. It will NOT be a good substitute for treasuries, agencies, munis, or high grade corps, which all traditionally have very low betas to the stock market.

For example.....

PFF has a beta of 104% of the S&P 500 for the past two years. It has an 85% r^2 during the same period.

JNK has an 80% beta with a 95% r^2 for the same 2 year period.

These are using standard daily closes and log beta caluclations.

Anyone interested in discussing further can e-mail me at mark@friedenthalfinancial.com.

[masmas]

john47,
I have to reiterated what markfriedenthal said about understanding those securities. Junk bonds and preferred stock are a middle ground between common stocks and investment-grade bonds.

Junk bonds react in the market more closely to common stock (as unsecured debt there is basically nothing backing them). If these companies default you are effectively on the same tier as common stock holders.

On the other side, preferred stock often tracks more closely to investment-grade debt. They are a more senior level than common stock and have to pay out a specified dividend before dividends can be paid out to common stock. Nonetheless, they fall below debtors on the seniority ladder.

I am not speaking against either JNK or PFF; I have owned both of them. As yield-boosters they are great. As the core of an income-focused portfolio, not so great.