Preferred’s Zombie Limbo Zone

Today, my “preferred” shared, GEG and GEJ showed up with no price quote at Yahoo. With a little bit of poking around they are now called GEG-CL and GEJ-CL at GEG/CL, GEJ/CL at Scottrade. So the CL must mean something. That something is ‘Called’

You have to poked even farther to learn this was announced some months ago, although I was never informed back then. Oh well. I get my $25/shr back plus accrued interest towards the next dividend date (0.32 and 0.48) if you believe the price quote and I do. But that won’t happen until Jan 18, 2013 and that means I can’t trade them nor do I have their cash to buy something else. Not really a problem for me but It’s good the see how this happens in real life. I suspect USB will call my 8% notes as soon as they can too. Their share price has dropped to par + interest payment.

What does matter, or might matter is how ETF’s (like PFF) deal with called notes/shares. I know what they do with preferred shares that are suspended – they are listed as ***non-performing assets (thanks RBS) and the ETF price drops by their weighting amount in the index, more or less. The real question is what does that underlying index do when the shares are called? I’m guessing they do something like the bond ETF’s do when one of the bonds matures. They change the index holdings and ETF has to buy/sell to match it.

I saw this with the IEF U.S. Treasury Bond ETF where they replaced mature bonds with lower yielding newer bonds which over time, reduces the yield of the portfolio. It’s now about half the yield of what I was getting when I owned IEF a few years ago. I saw that happening and sold it with a cap gain. If I’d held to todays prices the cap gain would be larger. Larger enough? Not in my opinion. I don’t trade fixed income. I buy and hold until I shouldn’t.

That’s going to happen with preferred shares/notes and the ETF’s that hold them. It’s not a fast moving event because of their structure and holdings, but it will happen. Time to look for the exit and think about a replacement.