A few weeks ago, I told you about exchange-traded debt. These securities are very interesting because they provide the safety of bonds, but the yields of preferred stock and liquidity of equities.
Companies issue debt to finance operations, and that debt is usually in the form of bonds. There is a market for bonds, but they can be difficult to trade, they trade without much liquidity and often in $10,000 bunches. The advantage of debt is the regular interest payments the company must make to holders, and that debt holders have top position in the event of bankruptcy. They are first in line to receive back principal.
Preferred stock is a stock-bond hybrid that often pay dividends instead of interest, in the 5% to 9% range. It has an advantage in being behind debt for principal recovery but ahead of common stock. It tends to trade in a limited range, but often lacks liquidity as well. Preferred stock dividends also only get cut after common dividends, so that’s another advantage.
Exchange-traded debt fits right between bonds and preferred stock in the capital stack. ETD is next in line to bonds, and if it happens to be senior secured ETD, then its actually in first position. Exchange-traded debt pays interest, so it does get taxes as ordinary income, rather than at the 20% qualified dividend rate. However, ETD tends to be much more liquid.
Here are three ETDs that I think are good additions to a fixed-income portfolio: