The Riskalyze Report: Advisors Add Preferreds, Senior Loans

January 22nd – January 28th

Josh here – according to Riskalyze CIO Mike McDaniel, “Advisor use of winners increased by 5% week over week. Advisors decreased their usage of TROW and PAYX by ~10% week over week.”

The addition of senior loans and preferreds is an interesting expression of yield hunger. The big risk to preferred stocks is the creditworthiness of the issuers – it’s almost entirely banks. No one has real concern about the creditworthiness of banks these days (they might even be, gasp, overcapitalized), so the yields on preferreds are considered safe. You’re getting a higher yield than junk too (5.85% vs 5.3% for the HYG ETF of junk bonds).

Let’s talk about senior loan ETFs for a moment. If you think that higher rates are on the menu this year, then senior loan portfolios become more attractive given the fact that they are are floating rate instruments. Interest rates are benchmarked to LIBOR plus a spread to compensate for credit risk. Senior loans are also said to have a higher recovery rate than high yield bonds in the event of a bankruptcy.

*(to state the obvious, Riskalyze does not share client sensitive data with me or use animals in testing).