Blogs & Comment

An alternative to buying bonds

Investors often dont like buying individual bonds because they are under the impressionbondscan only be obtained in the over-the-counter market, where wide bidask spreads entail rather high transactions costs for all but large buyers. But there is a more transparent and less costly alternative if you dont mind a smaller range of choices: exchange-traded bonds, otherwise known as trust preferreds.
These are trusts that hold bonds issued by a company. And over a thousand are listed on North American stock exchanges. One caveat is that many are rather illiquid, or on the pink sheets.
An article by Richard Lehman in Forbesoffers a good primer. As he mentions, there are some wrinkles to know about. For example, i) third-party trusts appear to be better to own, ii) call dates can be earlier than the underlying bond, and iii) they trade flat (interest does not accrue between payment dates).
There is a website,,where interested investors cansearch through the universe of trust preferreds. It tracks other exchange-traded incomesecurities too.
Trust preferreds might be particularly appealing when the stock market is in a bearish phase. Price discounting also extends to the trusts and pushes yields to high levels. Rather than buy stocks in anticipation of a recovery, buy the trusts since they pay quite handsomely while waiting and have less risk (rank ahead of common/preferred shares in a windup).
Sacha Peter buys and sells trust preferreds for his own account and periodically posts accounts of his trades in his blog. They can be informative to those who want to learn more see, for example, the August 17 post.