PrefBlog

You can’t make a silk purse out of sow’s ear, but you can always flog investments by spouting meaningless figures.

The Claymore Preferred ETF started trading on the TSX today, and the TSX advises us that 300,000 shares of the “Common Class” (CPD) are outstanding, as are 200,000 of the “Advisor Class” (CPD.A). So, assets of about $10-million. It’s a fair start, and it’s a bigger fund than Malachite Aggressive Preferred!

What has raised my ire, however, is their reporting of yield, which was largely supported by the S&P press release and relayed in the Globe & Mail in Rob Carrick’s column:

The yield on preferred shares is unspectacular at 4 to 5 per cent in most cases, but you get preferential tax treatment through the newly enhanced dividend tax credit. In fact, a 4.5-per-cent dividend yield is equivalent to a bond yield of about 6 per cent on an after-tax basis….The yield for the preferred share index is about 4.66 per cent. Factor in the 0.45-per-cent management expense ratio of the Claymore preferred share ETF and you’re left with a real-world yield of about 4.21 per cent.

The Claymore website reports “Weighted Average Yield” as 4.86% and “Weighted Average Dividend (Coupon)” as 5.26%. OK, let’s get things a little straight, here. The last figure, “Weighted Average Dividend (Coupon)” is a fairly meaningless figure, used to give an idea of whether a particular index is trading at a premium or not. Claymore does not specifically define this term, but I don’t see that it can possibly be anything other than Dividend / Par Value.

“Weighted Average Yield”, beloved of Claymore, S&P and Rob Carrick, is the Current Yield – again, the various participants are far too ashamed of themselves to define the term, but it can’t be anything else than Dividend / Market Price. This is a thoroughly nonsensical value to use, as it does not account for amortization of the premium to the expected call date – it assumes that nothing will ever be called.

As I discussed in A Call, too, Harms (and applied to the analysis of other closed-end funds in Closed End Preferred Funds: Effects of Calls), Yield-to-Worst is a much better, conservative, analytical measure than either of the two measures given above. When discussing bonds, for instance, the Globe and Mail does not report “Average Coupon”, or “Current Yield” – they use yield to maturity – equivalent to Yield-To-Worst for bonds with a single maturity and no embedded options.

The calculation of Yield-to-Worst is discussed in my article Yield Ahead, which includes a reference to Keith Betty’s Yield Spreadsheet ((broken link redirected 2024-2-1) (which is linked on this blog as an “Online Resource”). 

The holdings of the fund have been published (well, disclosed as percentages, anyway) and Claymore has done a very good job in making the list downloadable as an Excel Spreadsheet. I’ve taken that raw material and filled in Yield-to-Worst from the HIMIPref™ pre-tax bid-YTW calculations.

In a few cases, I had to guess which issues they really meant; in others I replaced a negative YTW with zero – if anything, the figures shown will overstate the actual mean average Yield-to-Worst of the portfolio.

The value is 3.84%.

That’s probably comparable with the value for the other ETFs on the market, but I haven’t updated my calculations for those funds. The holdings of the Claymore ETF itself are an entirely reasonable market index (which means easy to beat! An active manager doesn’t have to hold the stuff with bond-like interest-equivalent yields-to-worst, even ignoring the potential for trading!) BUT THE YIELD CANNOT BE CLAIMED TO BE OVER 4.5% BY ANY RESPONSIBLE PERSON, without an awful lot of caveats to explain to Granny Oakum that there is good reason to believe that such a yield (Current Yield, Coupon Yield) will not be realized as actual money-in-the-bank yield.

This should not be taken as a knock against the Claymore ETF, or as a reason, in and of itself, to avoid the issue. It’s an ETF, it reflects the overall market, full stop. If an investor wants a passive fund then (subject to more intensive analysis), I’m sure it’s basically as good as any other. And comparing the Index Returns disclosed on the Investor Fact Card doesn’t have me quaking in my boots about the potential for active management.

See the main Malachite Aggressive Preferred Fund page for more information. Past performance is not indicative of future returns, and I most particularly do not expect to see returns such as 2003’s again! I don’t WANT to see them again … that was a result of Bombardier Preferreds going completely crazy and represented a recovery from a horrible 2002. MAPF returns are shown after expenses, but before fees.

But there will always be investors who want a brand name rather than performance, so the index funds will do just fine.

I’ll probably be writing a full analysis of the Claymore fund in the near future. Hat tip to Financial Webring Forum for a discussion of this issue that made me realize how much of the yield disinformation is accepted at face value even by knowledgable retail investors.

Update: For comparison purposes, one may find current yields and yields-to-worst reported daily with the HIMI Preferred Indices, reported in this blog in the Market Action category. The Weighted Average Current Yield for MAPF at the close today was 5.05%; the Weighted Average Yield-to-Worst was 4.42%.