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ETF Stats For November 2015: Fund-Of-Funds Count At 76

Twenty-one launches and two closures brought the quantity of U.S.-listed exchange traded products to 1,824 (1,623 ETFs and 201 ETNs) at the end of November. Overall assets climbed 1.0% for the month to $2.14 trillion, with actively managed funds garnering a 1.7% increase. Trading activity plunged 20.7% to $1.3 trillion, as fewer products changed hands in the holiday-shortened month. Fund-of-funds products accounted for nine of November’s launches, and their quantity now stands at 76. As their name implies, these are ETFs that own other ETFs (and ETNs) instead of directly owning the underlying stocks and bonds. Assets in fund-of-funds ETFs surpassed $13 billion in November. However, these assets are not included in the overall industry asset statistics, because doing so would amount to double counting. It is important to take note of the growth in this category, though, as their quantity has jumped from 43 to 76 this year, and assets have surged 191%. Although you don’t hear too much about these products, their asset levels are on a path to overtake ETNs next year and actively managed ETFs in 2017. The popularity of currency hedging is one of the reasons for the recent rapid growth in the fund-of-funds segment. Eight of the nine new fund-of-funds ETFs launched in November are currency-hedged versions of existing products. Rather than buying and holding the 356 stocks of iShares MSCI All Country World Minimum Volatility ETF (NYSEARCA: ACWV ), the new iShares Currency Hedged MSCI ACWI Minimum Volatility ETF (BATS: HACV ) just buys ACWV along with a currency overlay to hedge the currency exposure. Every dollar invested in HACV results in a one-dollar increase in ACWV’s reported assets. Industry-wide assets in the U.S. are now at $2.14 trillion, and represent a 7.1% increase for the year. Splitting out the two major groupings, ETFs have seen a 7.4% increase in 2015, while ETNs have experienced a 16.5% decline. Actively managed ETFs have jumped 28.7%, and, as mentioned previously, the fund-of-funds segment has seen a whopping 191% surge. The quantity of funds with more than $10 billion in assets held steady at 52, and they represent 60% of U.S. industry assets. The quantity of products with at least $1 billion in assets slipped by one to 254, and they account for 89.7% of the assets. The average product has $1.2 billion in assets, yet the median asset level is just $70.2 million, making for a very lopsided market. Trading activity remains concentrated in relatively few ETFs. Only seven averaged more than $1 billion a day in activity, but these seven grabbed a 47.5% market share. The quantity of ETFs and ETNs with more than $100 million in average daily dollar volume decreased from 94 to 90, and accounted for 86.5% of the action. A whopping 266 products (14.6%) did not trade on the last day of November, and 21 went the entire month without a trade. November 2015 Month End ETFs ETNs Total Currently Listed U.S. 1,623 201 1,824 Listed as of 12/31/2014 1,451 211 1,662 New Introductions for Month 21 0 21 Delistings/Closures for Month 2 0 2 Net Change for Month +19 0 +19 New Introductions 6 Months 160 8 168 New Introductions YTD 249 12 261 Delistings/Closures YTD 77 22 99 Net Change YTD +172 -10 +162 Assets Under Mgmt ($ billion) $2,119 $22.5 $2,141 % Change in Assets for Month +1.1% -4.8% +1.0% % Change in Assets YTD +7.4% -16.5% +7.1% Qty AUM > $10 Billion 52 0 52 Qty AUM > $1 Billion 249 5 254 Qty AUM > $100 Million 784 34 818 % with AUM > $100 Million 48.3% 16.9% 44.9% Monthly $ Volume ($ billion) $1,287 $52.3 $1,339 % Change in Monthly $ Volume -20.6% -22.9% -20.7% Avg. Daily $ Volume > $1 Billion 6 1 7 Avg. Daily $ Volume > $100 Million 85 5 90 Avg. Daily $ Volume > $10 Million 302 11 313 Actively Managed ETF Count (w/ change) 135 +2 mth. +10 ytd Actively Managed AUM ($ billion) $22.2 +1.7% mth. +28.7% ytd Data sources: Daily prices and volume of individual ETPs from Norgate Premium Data. Fund counts and all other information compiled by Invest With An Edge. New products launched in November (sorted by launch date): The iShares Currency Hedged MSCI ACWI Minimum Volatility ETF ( HACV ), launched on 11/2/15, is a fund-of-funds designed to track the investment results of a global index composed of developed and emerging market equities that have relatively low volatility characteristics, while mitigating exposure to fluctuations between the value of the component currencies and the U.S. dollar. The ETF holds the unhedged iShares MSCI All Country World Minimum Volatility ETF ( ACWV ), and then adds forwards to manage the currency risk. Twenty-four countries or regions are represented, and most holdings are consumer staples, financials, and healthcare companies. Its expense ratio is 0.23%. The iShares Currency Hedged MSCI EAFE Minimum Volatility ETF (BATS: HEFV ), launched on 11/2/15, is a fund-of-funds investing in equities of all capitalizations from Europe, Australia, Asia, and the Far East that display low volatility compared to other equities in the regions, while reducing the impact of changes between the value of the underlying currencies and the U.S. dollar. The ETF holds the unhedged iShares MSCI EAFE Minimum Volatility ETF (NYSEARCA: EFAV ), and manages the currency risk with forwards. Japan and the U.K. combine to hold over 50% of the allocations, and the majority of holdings come the from consumer staples, financials, and healthcare sectors. Investors will pay 0.23% annually to own this fund. The iShares Currency Hedged MSCI EM Minimum Volatility ETF (BATS: HEMV ), launched on 11/2/15, is a fund-of-funds aiming to track the investment results of a global index of emerging market equities that have relatively low volatility characteristics, while mitigating exposure to fluctuations between the value of the component currencies and the U.S. dollar. The ETF holds the unhedged iShares MSCI Emerging Markets Minimum Volatility ETF (NYSEARCA: EEMV ) and adds forwards to manage the currency risk. China, Taiwan, and South Korea each have over a 10% allocation, and the financials sector represents about 28% of the portfolio. The ETF has an expense ratio of 0.28%. The iShares Currency Hedged MSCI Europe Minimum Volatility ETF (BATS: HEUV ), launched on 11/2/15, is a fund-of-funds investing in large- or mid-capitalization companies in developed European countries that display low volatility compared to other European equities, while reducing the impact of changes between the value of the underlying currencies and the U.S. dollar. The ETF holds the unhedged iShares MSCI Europe Minimum Volatility ETF (NYSEARCA: EUMV ), and then adds currency forwards to offset value changes in the relevant currencies. The U.K. leads the geographic allocation at 35%, and the majority of holdings come from the consumer staples, financials, and healthcare sectors. The ETF sports a 0.28% expense ratio. The iShares Currency Hedged MSCI Europe Small-Cap ETF (BATS: HEUS ), launched on 11/2/15, is a fund-of-funds holding small-capitalization companies in developed European countries, while mitigating exposure to fluctuations between the value of the component currencies and the U.S. dollar. The ETF holds the unhedged iShares MSCI Europe Small-Cap ETF (NASDAQ: IEUS ), and then adds forwards to manage the currency risk. The largest country representation goes to the U.K. at 36%. Financials and industrials lead the sector allocations at around 23% each. The ETF has a 0.43% expense ratio. The BlueStar TA-BIGTech Israel Technology ETF (NASDAQ: ITEQ ), launched on 11/3/15, provides exposure to Israeli technology companies listed on global stock exchanges. The companies are not required to be domiciled in Israel to be included, but they must have significant ties to the country, such as a domicile, a strong presence of research, development, primary management, tax status, source of revenue, or location of employees. The companies represent a wide range of technological areas, including information, biotechnology, sustainable agriculture, and defense technologies. The ETF holds 65 positions, with just three representing 30% of the fund. Investors will pay 0.75% annually to own this ETF. The First Trust SSI Strategic Convertible Securities ETF (NASDAQ: FCVT ), launched on 11/4/15, is an actively managed ETF investing in global convertible securities. Convertible securities are considered hybrid securities because they offer upside potential through participation in equity returns, but also have a degree of downside protection through their bond-like attributes. They usually consist of debt or preferred securities that may be exchanged into a certain amount stock or other equity security. No yield information is provided. FCVT’s expense ratio is 0.95%. The PowerShares FTSE International Low Beta Equal Weight Portfolio (NASDAQ: IDLB ), launched on 11/5/15, provides investors with exposure to large- and mid-capitalization companies from developed markets (except the U.S.) that show less price sensitivity (low beta) compared to the overall market of the country in which the company is based. IDLB currently has 783 holdings, which are equally weighted upon rebalancing. The ETF sports a 0.45% expense ratio. The PowerShares Russell 1000 Low Beta Equal Weight Portfolio (NASDAQ: USLB ), launched on 11/5/15, selects its holdings by starting with the 1,000 U.S. companies that have the largest market capitalizations and then analyzing their price sensitivity. Those that show less price sensitivity (low beta) to market movements are eligible for inclusion. Currently, there are 418 equally weighted holdings, and the fund’s expense ratio is 0.35%. The AlphaClone International ETF (NYSEARCA: ALFI ), launched on 11/10/15, aims to provide value to investors by evaluating the performance of large hedge funds and institutional investors and purchasing select international companies via American Depository Receipts (ADRs) held by those entities. The strategy of the underlying index is to rank each manager’s performance by calculating the return of their publicly disclosed positions, such as from the Form 13F filings, and then select the 40-50 ADRs held by those with the highest rankings. The ETF can vary between being long-only and market-hedged based on a 200-day simple moving average of the S&P 500 Index. Investors will pay 0.95% annually to own this ETF. The FlexShares Currency Hedged Morningstar DM ex-US Factor Tilt Index Fund (NYSEARCA: TLDH ), launched on 11/10/15, is a fund-of-funds designed to provide broad exposure to developed equity markets outside the U.S. with enhanced weightings to small capitalization and value stocks, while mitigating the effects of currency fluctuations. The ETF holds the FlexShares Morningstar Developed Markets ex-US Factor Tilt Index Fund (NYSEARCA: TLTD ), and then uses forward contracts to hedge the currency exposure. The expense ratio will be capped at 0.47% until November 4, 2016. The FlexShares Currency Hedged Morningstar EM Factor Tilt Index Fund (NYSEARCA: TLEH ), launched on 11/10/15, is a fund-of-funds focusing on emerging markets, but adjusts standard market-cap weighting to provide additional weights to small-capitalization and value stocks. It then hedges against changes in value between the U.S. dollar and constituent currencies. Its main holding is the FlexShares Morningstar Emerging Markets Factor Tilt Index Fund (NYSEARCA: TLTE ), and the currency exposure is mitigated using forward contracts. The expense ratio will be capped at 0.70% until November 4, 2016. The Goldman Sachs ActiveBeta International Equity ETF (NYSEARCA: GSIE ), launched on 11/10/15, uses an index-based strategy that gives all constituents in the MSCI World ex-USA Index a score based on measures of value, momentum, quality, and low volatility. Security scores higher than a fixed “cut-off score” are overweighted, while securities with a score below are underweighted. The expense ratio will be capped at 0.35% until September 14, 2016. The First Trust Heitman Global Prime Real Estate ETF (NYSEARCA: PRME ), launched on 11/12/15, is an actively managed ETF investing globally in shares of public real estate companies that own top-tier properties in the world’s prime markets and cities. “Prime” is defined by the managers as those “that benefit from global physical and/or financial trade, have high barriers to entry, dominate their regions or countries, or provide high-value niche goods and services.” The U.S. has the largest geographic allocation at 31%, and Japan comes in second at 14%. PRME has an expense ratio of 0.95%. The iShares Core International Aggregate Bond Fund (NYSEARCA: IAGG ), launched on 11/12/15, selects global non-U.S. dollar denominated, investment-grade bonds and then uses currency forward contracts to hedge against fluctuations in the relative value of the component currencies to the U.S. dollar. There are currently 534 holdings in 55 countries. The ETF sports a 0.15% expense ratio. The WisdomTree Global SmallCap Dividend Fund (BATS: GSD ), launched on 11/12/15, provides exposure to small-capitalization companies in developed countries and emerging markets that pay dividends. The underlying index selects the largest 1,000 companies in the bottom 5% of the WisdomTree Global Dividend Index that have a market capitalization of at least $200 million and average daily dollar volume of at least $100,000. Holdings are weighted based on dividends. The expense ratio is 0.43%. The Etho Climate Leadership U.S. ETF (NYSEARCA: ETHO ), launched on 11/19/15, invests in a broad range of U.S. companies that display the smallest carbon footprints in their respective industries. The strategy takes into account items such as greenhouse gas emissions from operations, fuel use, supply chain, and performance on environmental issues. It holds about 400 securities, but none in the energy, tobacco, aerospace and defense, gambling, gold, or silver industries. Investors will pay 0.75% annually to own this ETF. The WisdomTree Global Hedged SmallCap Dividend Fund (BATS: HGSD ), launched on 11/19/15, is a fund-of-funds providing exposure to 1,000 dividend-paying, small-capitalization companies in the bottom 5% of the WisdomTree Global Dividend Index, while hedging against currency risk. The ETF holds WisdomTree Global SmallCap Dividend Fund ( GSD ) and then uses forward contracts to mitigate the effects of changes in the relative value of foreign currencies and the U.S. dollar. The expense ratio will be capped at 0.43% until July 31, 2018. The Deutsche X-trackers FTSE Developed ex US Enhanced Beta ETF (NYSE: DEEF ), launched on 11/24/15, selects securities in developed countries outside the U.S. based on five investment factors. The factors are valuation ratios (value), 11-month cumulative return (momentum), leverage and profitability (quality), standard deviation of returns (volatility), and market capitalization (size). There are currently 828 holdings, with 31.8% in Japan and 20% each in financials and industrials. DEEF has an expense ratio of 0.35%. The Deutsche X-trackers Russell 1000 Enhanced Beta ETF (NYSE: DEUS ), launched on 11/24/15, selects a diversified group of US securities based on quality, value, momentum, low volatility, and size factors. The underlying index currently holds nearly 850 companies that were chosen based on these factors. The expense ratio is 0.25%. The FlexShares Real Assets Allocation Index Fund (NASDAQ: ASET ), launched on 11/24/15, is a fund-of-funds offering access to physical or tangible assets (examples of which are commodities, precious metals, oil, and real estate) by investing in three other FlexShares ETFs. The underlying ETFs and current allocations are the FlexShares STOXX Global Broad Infrastructure Index ETF (NYSEARCA: NFRA ) 49.8%, the FlexShares Global Quality Real Estate Index ETF (NYSEARCA: GQRE ) 40.5%, and the FlexShares Global Upstream Natural Resources Index ETF (NYSEARCA: GUNR ) 9.8%. The expense ratio will be capped at 0.57% until November 8, 2016. Product closures in November and last day of listing: EGShares Blue Chip ETF (NYSEARCA: BCHP ) – 10/30/2015 EGShares Brazil Infrastructure ETF (NYSEARCA: BRXX ) – 10/30/2015 Note: These two ETFs had their last day of listed trading on October 30. However, since they were still officially listed at the end of that month, their assets are included in the October statistics and their closures are included in the November statistics. Product changes in November: The AdvisorShares Sunrise Global Multi-Strategy ETF (NASDAQ: MULT ) underwent an extreme makeover on November 4, becoming the AdvisorShares Market Adaptive Unconstrained Income ETF (MAUI), with a new manager and subadvisor. The ProShares 3x Leveraged and 3x Inverse Financial Sector ETFs ( FINU and FINZ ) changed their underlying indexes to S&P Select Sector Indexes effective November 4. ProShares executed forward splits on two ETFs ( BZQ and ZSL ) and reverse splits on five ETFs ( GDXX , GDJJ , UOP , UBR , and UBIO ) effective November 13 . Global X had reverse splits on five ETFs ( COPX , GLDX , LIT , SIL , and URA ) effective November 18. The SPDR Barclays Aggregate Bond ETF changed its ticker symbol from LAG to BNDS effective November 20. Announced product changes for coming months: Van Eck Global plans to acquire Yorkville MLP ETFs and hopes to close the transaction in the fourth quarter, but it’s running out of time. Both ETFs ( YMLP and YMLI ) have lost more than 35% of their value since the August 3 announcement. The Guggenheim BulletShares 2015 Corporate Bond ETF (NYSEARCA: BSCF ) and the Guggenheim BulletShares 2015 High Yield Corporate Bond ETF (NYSEARCA: BSJF ) are scheduled to mature and liquidate on December 31 , with December 30 being the last day of trading. The Guggenheim Russell 1000 Equal Weight ETF (NYSEARCA: EWRI ) will cease to exist on January 27, 2016. At that time, any remaining assets in the fund will be merged into the Guggenheim S&P 500 Equal Weight ETF (NYSEARCA: RSP ). Guggenheim will change the name and underlying indexes for three of its ETFs effective January 27, 2016. The Guggenheim Russell 2000 Equal Weight ETF (NYSEARCA: EWRS ) will become the Guggenheim S&P SmallCap 600 Equal Weight ETF (EWSC), the Guggenheim Russell MidCap Equal Weight ETF (NYSEARCA: EWRM ) will become the Guggenheim S&P MidCap 400 Equal Weight ETF (EWMC), and the Guggenheim Russell Top 50 Mega Cap ETF (NYSEARCA: XLG ) will become the Guggenheim S&P 500 Top 50 ETF ( XLG ). Previous monthly ETF statistics reports are available here . Disclosure: Author has no positions in any of the securities, companies, or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) is received from, or on behalf of, any of the companies or ETF sponsors mentioned.

Risk Asset Update: Vast Majority Agonize Since The S&P 500’s August Lows

The fact that lower energy prices are not providing the anticipated windfall to economic sectors that should benefit from lower oil prices continues to confound analysts and economists alike. Rapidly falling oil and commodity prices have hampered energy stocks, materials stocks and resources-dependent exporting countries. Yet investor trepidation has spread to other risk assets as well. If risking one’s capital in non-U.S. stocks, small-cap U.S. stocks, high yield bonds, foreign bonds commodities, and a wide range of U.S. sectors is proving detrimental, what’s left? Weren’t lower oil prices supposed to act like a “tax cut” for U.S. households? If families spend less at the gas pump, then they will spend more of their dollars at the mall. At least that’s what mainstream media cheerleaders like CNBC’s Jim Cramer have insisted throughout the year. In contrast, the S&P SPDR Retail Index (NYSEARCA: XRT ) demonstrates that investors are not particularly impressed by the prospects of American retailers. The current price for the exchange-traded fund tracker is lower than the price during the summertime stock market correction. What’s more, XRT is trading 14% below its 2015 high. Well, okay. Maybe consumers are pocketing some of their gasoline savings. Maybe they’re choosing to pay down some of their debts. No matter. Lower energy costs surely must boost bottom line profits of transportation companies – truckers, airlines, shippers, railways. Maybe not. The iShares DJ Transportation Average ETF (NYSEARCA: IYT ) shows that investors see big troubles for American transportation corporations. The current price on IYT is near a 52-week low and sits approximately 10% below a long-term 200-day trendline. Equally troubling, IYT is trading near the lows of the August-September sell-off and it remains down 16.5% year-to-date. The fact that lower energy prices are not providing the anticipated windfall to economic sectors that should benefit from lower oil prices continues to confound analysts and economists alike. For one thing, most of them have completely missed the cons of of commodity price depreciation; that is, gains for commodity users would be offset by losses for the producers (e.g., energy, materials, natural resources, etc.). Second, if the losses by the producers become bad enough, the number of resources-dependent exporters crimping global world product (GWP) can play into the notion of worldwide recessionary pressures. In other words, the U.S. is not an island; the well-being of the global economy matters more for risk taking in market-based securities than a simplistic assessment of oil savings benefiting retailers and/or transporters. Just how bad do resource-dependent exporters have it? The second largest non-OPEC provider of oil to the world is Canada. The iShares MSCI Canada ETF (NYSEARCA: EWC ) is in a bear market with price depreciation in the realm of 32%. Myopic S&P 500 bulls dismiss the bear market in energy stocks and energy-dependent producers like Canada. Yet the problems extend far beyond the oil patch. There is a 46% bearish decline across the entire commodity complex via the GreenHaven Continuous Commodity Index ETF (NYSEARCA: GCC ) due to weakening demand for “stuff” in the developing world and a surge in the U.S. dollar. When China, the world’s second largest economy and the world’s largest trader of goods witnesses year-over-year import declines of 18.8%, something’s not quite right. Rapidly falling oil and commodity prices have hampered energy stocks, materials stocks and resources-dependent exporting countries. Yet investor trepidation has spread to other risk assets as well. The demise of appetite for high yield bonds in the SPDR Barclays High Yield Bond ETF (NYSEARCA: JNK ) has been blamed on everything from energy company debt woes to the collapse of the mutual fund, Third Avenue Focused Credit. However, an in-depth look at the high yield bond space shows that “Ex-Energy” high yield bonds have been diverging from the S&P 500 throughout the year . In other words, people want out of junk bonds because they are lowering their overall risk profile, not simply because of the asset class association with the beleaguered energy sector. It is worth noting, then, that a wide range of risk assets are trading at prices that are in the same shape or in worse shape as they were back when the S&P 500 hit 52-week lows (1867). Energy stocks, retail stocks, transportation stocks, oil exporting countries, high yield bonds, commodities – each of these asset types are struggling mightily. And that’s not all. The iShares MSCI ACWI ex-U.S. Index ETF (NASDAQ: ACWX ) is more or less constrained. Small-cap U.S. stocks via the iShares Russell 2000 ETF (NYSEARCA: IWM ) are timid. In fact, both ACWX and IWM are below respective long-term moving averages and both are more than 10% off 52-week peaks set back in the first half of the year. If risking one’s capital in non-U.S. stocks, small-cap U.S. stocks, high yield bonds, foreign bonds commodities, and a wide range of U.S. sectors (e.g., energy, materials, utilities, retail, transports, etc.) is proving detrimental, what’s left? Large-caps via the S&P 500 and the NASDAQ . Even here, though, some of the leadership in biotech names have yet to recover former glory. The SPDR Biotech ETF (NYSEARCA: XBI ) trades lower today that it did when the S&P 500 hit its 1867 bottom; it is 25% off its 2015 pinnacle and well below its long-term trendline. In sum, leadership across risk assets is so narrow, risking one’s capital in anything other than the large-cap indexes may not be worth it. Indeed, one may wish to keep in mind that while the S&P 500 has been resilient in 2015, it has remained below its May record (2134) for close to seven months. More resilient? Long-term treasury bonds in the face of a Fed that intends to hike overnight lending rates. The iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) is 5% higher than it was in the heat of July. For Gary’s latest podcast, click here . Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

Asset Class Weekly: Preferred Stock Collateral Damage

Summary The preferred stock market has come to be seen by many investors as a refuge in post financial crisis markets. But for those allocated to the preferred stock space, now is not the time for complacency. Preferred stocks have not been without their own past periods of extreme downside volatility. And the asset class resides worryingly close to the current wildfires now blazing in the high-yield bond market. The preferred stock market has come to be seen by many investors as a refuge in post financial crisis markets. Price performance has been notably consistent and income has been relatively generous at a time when those living on fixed incomes are starving for yield. And unlike other high-yielding markets such as high-yield bonds (NYSEARCA: HYG ) and master limited partnerships (NYSEARCA: MLPI ), it has not fallen victim in recent years to sudden bouts of unsettling downside volatility. But, for those allocated to the preferred stock space, now is not the time for complacency. Preferred stocks have not been without their own past periods of extreme downside volatility. And the asset class resides worryingly close to the current wildfires now blazing in the high-yield bond market. Preferred Stocks: A Lot To Like Up until recently, I had been meaningfully allocated to preferred stocks for some time. The reasoning for this maximum strategy allocation to the asset class was driven by the fact that there is a lot to like about the preferred stock space. First, preferred stocks were a more fairly valued option in an otherwise richly-valued high-income universe. Preferred stock yield spreads relative to U.S. Treasuries have been fairly consistent throughout the post-crisis period. According to the iShares S&P Preferred Stock Index (NYSEARCA: PFF ) relative to a benchmark 10-year Treasury yield, the current spread is at 3.7%, which is in the middle of the post-crisis range and well above the levels seen prior to the financial crisis in 2007 when this spread had dipped below 2%. (click to enlarge) And on an absolute basis, yields have remained relatively attractive at above 6% after cresting as high as 7% in late 2014. And this absolute yield is consistent with what we have seen from the category over the past decade. (click to enlarge) Adding further to the appeal of the preferred stock asset class has been the relative quality advantage enjoyed by preferred stocks relative to other higher-yielding alternatives. For although owning preferred stocks in their various structures rank lower on the capital structure than the offerings in the high-yield bond space, investors are standing on the rungs of higher-quality companies that boast credit ratings that are “A” or better in many cases. Moreover, a vast majority of the preferred stock universe at more than 80% is made up of companies in the financial sector. While this dedicated sector exposure proved highly problematic during the financial crisis (more on this point later), in the current environment, it actually represents an advantage. For example, more than half of the preferred stock universe is made up of issuance from the systemically important financial institutions such as Bank of America (NYSE: BAC ), Wells Fargo (NYSE: WFC ), U.S. Bancorp (NYSE: USB ), JPMorgan Chase (NYSE: JPM ) and Goldman Sachs (NYSE: GS ) among others. And the one thing that has been relentlessly demonstrated by monetary policymakers during the post-crisis period is that the health of these institutions will be guarded and protected by policymakers at all costs no matter what new operational missteps are made in the future. So, for all of these reasons, the preferred stock space has been an ideal destination for capital during the post crisis period. And the consistently strong price performance from the asset class has been rewarding in recent years. (click to enlarge) But market conditions have been changing in 2015. And the risks are now rising for what has been a placid destination in recent years. A History Not Without Trauma While the last few years have been a blissful period for preferred stock investors, this has not always been the case. The asset class has endured its own periods of extreme trauma throughout history. (click to enlarge) For example, during the financial crisis, while the stock market as measured by the S&P 500 Index (NYSEARCA: SPY ) fell by more than -50% from peak to trough, the preferred stock universe performed measurably worse in falling by nearly -65% over the duration of the crisis. Of course, much of this downside was driven by the heavy weighting to financials in the asset class. And while this characteristic may imply a degree of downside protection today, if we do find ourselves in the midst of another global financial accident, the category would likely suffer disproportionately once again under such a scenario. The Threat Of Collateral Damage Today The larger risk facing the preferred stock universe today is the threat of collateral damage spilling over from the high-yield bond space. Why exactly would challenges in the lower credit quality segment of the high-yield bond space impact investment-grade-rated preferred stocks largely concentrated in financials? Because many of the money managers that operate in the high-yield bond space are also the same investors actively involved in owning other high-yielding investments such as senior bank loans (NYSEARCA: BKLN ), convertible bonds (NYSEARCA: CWB ) and preferred stocks. Why would this matter? Because, if you are a money manager that is in a cash crunch and the high-yield bonds that you own have turned illiquid, you will likely turn to sell the other higher-quality assets that are still liquid in order to raise cash. This is where the contagion effects of illiquidity in a certain segment of financial markets starts to spread. For just like the high-yield bond space, the preferred stock universe is not the most liquid category in financial markets despite the fact that these securities trade on an exchange. While some of the larger preferred stocks trade with reasonable volume under normal market conditions, it is nothing like what is seen in the common stock market, as bid-ask spreads are often wide on any given trading day. And a fair number of preferred stocks trade with volumes in the thousands to hundreds on any given day with some periodically going untraded on any given day. As a result, if liquidation pressures were to spill over into the preferred stock market in earnest, we could quickly see staggeringly dramatic intraday price movements that can extend for days, weeks or even months depending on the degree of market stress. For the nimble investor, such dramatic dislocations can present incredibly good buying opportunities to snatch up high-quality preferred securities at dramatic discounts that eventually provide robust capital gains with attractive yields paid along the way. But, for many retirees that are not interested in trading the wild swings of the preferred stock market but instead simply want to clip their coupons and sleep well at night, such wild price deviations can prove devastatingly traumatic, particularly if they are unaware that they may occur at any given point in time and be accompanied by the periodic dividend suspension and/or bankruptcy like those experienced by Lehman Brothers’ preferred stock investors back in 2008. Where Do We Stand Today? To date, the preferred stock universe as a whole continues to hold up fairly well. The asset class as measured by the iShares S&P Preferred Stock Index reached a dividend adjusted all-time high as recently as the end of November. And while the high-0yield bond market has fallen precipitously since the start of December with a more than -6% decline, the preferred stock market is lower by only a fraction at just over -2%. In short, all remains reasonably well. But not entirely so, as several cracks warrant attention. First, preferred stocks started the week on a troubling note. Preferred stocks opened lower and faded throughout the trading day, effectively ending on their lows. This stood in sharp contrast to high-yield bonds that found their footing around 11:30AM today and traded sideways for the remainder of the day. Monday was only one trading day, but investors are well served to monitor this recent development for any continuation to the downside, as this would suggest that the problem in high yield is starting to spread. (click to enlarge) Second, standing back and taking a broader view on preferred stocks, not only is the category now precariously perched on its ultra long-term 400-day moving average, but also as evidenced by its price chart dating back to the summer, it is prone to flash crash pressures like experienced on the wild trading day of August 24. (click to enlarge) Lastly, while the preferred stock universe in general continues to hold up, specific segments of the space are breaking down. During the financial crisis, it was financial preferreds that were obliterated while non-financial preferreds (NYSEARCA: PFXF ) largely held their own. This time around, non-financial preferred stocks from industries such as telecommunications, agriculture, healthcare services, oil & gas, mining and pipelines have deviated from the path of the broader preferred stock universe and have instead latched on to the high-yield bond path lower. (click to enlarge) Thus, while the preferred stock market continues to hold up, it is warranting increasingly close attention going forward, as risk levels are rising both around and within the asset class. Recommendations Much like the high-yield bond and master limited partnership investors that have now gone before, preferred stock investors would be well served to have a heightened level of risk awareness going forward. It may very well be that preferred stocks emerge unscathed from this latest episode of capital market stress. Then again, they may eventually fall victim to the spillover effects that are now dogging related asset classes. Does any of this suggest that the asset class will suddenly head straight to the downside tomorrow? Not at all, for it may take a fair amount of time before the preferred stocks succumb to any downside pressure if at all. And even if the category begins to buckle, it is likely to do so with fits and starts over a more extended period of time. But the fact remains that risk environment surrounding preferred stocks has been elevated from where it has been over the last several years. If nothing else, a heightened degree of price volatility should be expected going forward. Disclosure : This article is for information purposes only. There are risks involved with investing including loss of principal. Gerring Capital Partners makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Gerring Capital Partners will be met.