Update (12/31/2022):
It seems that new users have trouble registering for the forum. The confirmation email never shows up. I’ve decided to phase out this forum and transition over to a new forum plugin. The new location is here:
https://earlyretirementnow.com/forum-3/
Policies – please read!
- Everyone can read posts, but to start a new topic or add a reply you’d need to register. To create an ID, please verify your email address. You will get a link at that email address and you can then pick a password.
- Be courteous to others. Treat others like you like to be treated. Discuss the issues. No ad-hominem attacks!
- It’s OK to include external links if they are relevant. But please avoid spamming! Please no affiliate links.
- Before starting a new topic, please check if that question/topic has been discussed before already and add to that discussion instead of starting a new topic.
- If you’ve written a cool blog post that you want to share with others please post this in the “Self-Promo” category only!
- Please read the usual Disclaimers and the Privacy Policy!
- The forum policies may be amended in the future!
Any thoughts on PFFV for my preferred shares allocation?
https://www.globalxetfs.com/funds/pffv/
Its still very new (inception date 6/22/20) but it tracks a broad basket of U.S. variable rate preferred stocks. Expense ratio is .25% which is lower than the other etfs and makes it easier to manage than picking individual stocks on my own.
@fi4wanderlust Its definitely improvement in terms of expenses and interest rate risk over the other funds but if you're holding >$10k in a preferred etf, you can replicate a similar basket yourself for less relatively easily. One way is to look at the top holdings of the etf such as Goldman, Citi, Wells Fargo, Morgan Stanley preferred stocks, in fact 83% of the fund's holdings are financials. Start with 5-10 of the names that ERN has mentioned or are in the top holdings of PFFV and with every subsequent investment, just rotate which stock you're adding to keep fees down and stay diversified. A 0.25% expense ratio might not sound a lot now but imagine that your portfolio is 10x what it is now and the fees really start adding up. For example, a retiree who's targeting a 3% SWR rate would have to cut their annual spending budget by almost 7% with a 0.25% expense ratios vs a 0.05% E.R.
@fi4wanderlust Some of the smaller, low-fee ETFs have very low liquidity. Huge b/a spreads!
Thank you both. I'll do some more research tomorrow and will probably start off with 5 individual floating rate preferred and eventually add another 5 more.
Good catch on the b/a spreads! I didn't even pay attention to that. 31% spread is huge!
Since I'll be in the low 10-12% federal bracket this year (low ER spending), I dont think adding tax free muni funds will benefit me much with the margin cash. I think I will end up allocating 50% in bonds with equal weighting in BND, VCIT, and VCSH. 45% in individual preferred stocks and the remaining 5% in cash. Does not seem like a good balance for my margin cash?
@fi4wanderlust Seems like a very reasonable plan. Personally, I'm a little more risk adverse with my margin cash and hold more treasuries than others when selling leveraged puts. When things goes crazy like last March, I like to have that bucket there if I need for rare opportunities like buying stocks down 20-30%, rather than having the "safe" bucket being down 10-20%+ as well. Also, the yield risk premium for corporate debt is really narrow relative to treasuries right now so you aren't missing out on much by holding treasuries.
I realize corporate debt/preferreds have vastly outperformed treasuries the past 10+ years, and last year the fed has shown that it will be a backstop to corporate debt. It just seems that right now, I feel more comfortable holding treasuries when selling puts with 3x+ leverage. The next time the vix spikes above 30 and the credit risk premium expands, I'll roll those treasuries into more corporate debt/preferreds.
I'm not saying this is optimal, just is the right risk tolerance for me at the moment. I think if I had a higher tax bracket such as 32%+, I would not hold treasuries in a taxable account though.
@fi4wanderlust in contrast in my tax situation preferreds are taxed nearly 25% more than munis so they really have to do a lot better to compensate. I really have preferreds in here to diversify the asset classes. Good examples showing that each person’s optimal portfolio will be different!
Sorry I misread your answer, disregard "how could preferred be taxed more than muni's?"
@figuy1 Munis aren't taxed at all. Most preferred are taxed as qualified dividends. Which could be as low as 0%.
BTW...Big ERN recommended reading the book "Derivatives: Markets, Valuation, and Risk Management" by Robert Whaley to get a broad overview of derivatives. Instead of paying $150 to buy the book, I was able to get the ebook from my library! See if its available for yours first before buying it.
Also, this book is close to 1000 pages which is torture for someone with ADHD! If you have already read this book, are there specific chapters that are more pertinent to our SPX put selling strategy?
@fi4wanderlust Nice! I like the book because it has a CD-Rom (old tech, I know) with the option pricing formulas as an add-in for Excel.