Although markets continue to perform well, income-paying choices
remain favorites of many investors. Considering that many are
starved for current income thanks to extremely low yields, it isn't
hard to see why that these types of securities remain popular in a
number of portfolios, even with the market surge.
While high yielding sectors like consumer staples, utilities,
and financials, remain at the forefront of investors' minds, some
have begun to expand into potentially higher yielding but exotic
securities as well. These include BDCs, MLPs, and even preferred
securities, all of which have gained in exposure and popularity in
Still, preferred securities are often overlooked in favor of
BDCs and MLPs which have really taken off with investors as of
late. However, this may be to investors' detriment as these
preferred shares can offer up some exciting benefits to those
willing to give the space another look.
That is because preferred stocks generally have similar tax
treatments as 'regular' common stock-simplifying the process-while
they are ahead of these shares in a liquidation line. Although this
means that they usually don't get voting rights, they are often
less volatile then their common stock counterparts and generally
pay juicy yields as well (read Are Preferred Stock ETFs Worth The Risk? ).
Many investors, however, are not comfortable selecting
individual preferred stocks, so an ETF approach may be the way to
go for most. There are plenty of choices in this corner of the ETF
world, with several types of exposure offered, with one exception;
Strangely there wasn't a single actively managed preferred
out on the market, despite the relatively illiquid space, and the
lack of investor knowledge about preferred securities. That is no
longer the case anymore though, as First Trust has filled the void
with its Preferred Securities and Income ETF (FPE)
FPE in Focus
This new active ETF looks to provide investors with a robust
level of current income. The focus will be on preferred securities,
while it will also hold income-producing debt securities including
corporates, high yields, and convertibles.
At time of writing, the portfolio consisted of about 80
companies with a very low concentration ratio for the top ten
holdings. The industry profile is focused on financials though, as
insurance, REITs, Commercial Banks, and Capital Markets, all
account for at least 14.75% of the portfolio (see Three Overlooked High Yield ETFs ).
Investors should also note that StoneBridge Advisors LLC is the
sub-advisor to the fund, a company that specializes in preferred
and hybrid securities. Their focus is on providing solid returns
while limiting risk, so low volatility looks to be a theme in this
preferred security ETF.
How does it fit in a portfolio?
FPE looks to be a solid choice for investors who want a great
deal of current income, but a low level of volatility. It could
also be a decent pick for investors who believe that BDCs and MLPs
are overbid at this time, and that other corners of the financial
world are better avenues for investment at this time.
The ETF could also be interesting for those who believe in
active management and that the preferred stock segment is ripe for
these types of techniques. The space is relatively underappreciated
so FPE could be good for those who believe that a watchful eye of a
manager can pick the correct funds in this relatively overlooked
market (read Can You Beat These High Dividend ETFs? ).
It may not be the best choice for cost-focused investors though,
as a relatively steep 85 basis point cost does make it pretty
expensive, although pretty much in line for actively managed
'exotic' products like this one.
Bid ask spreads may be a bit light initially too, so it probably
isn't a great idea for traders, although one has to question the
wisdom of short-term trading on such a static corner of the market
Can it succeed?
Generally speaking, actively managed products haven't really
been embraced by many in the ETF world. This is starting to change
though as more of these funds are coming on the market, and opening
up a variety of less liquid corners to everyday investors.
FPE will certainly have its hands full beyond the active
management issue though, as the product compares extremely
unfavorably on an expense ratio perspective and is the most
expensive ETF in the category by a wide margin.
Furthermore, three funds, PGF , PGX , and PFF have more than $1 billion
in total AUM so there are definitely some entrenched participants
in the preferred security ETF world (see 3 Excellent ETFs with More than 4% Yield ).
Even with these issues, FPE could see some decent inflows as it
could be a high income choice in the space, something that
investors have clearly embraced time and time again. So, if
FPE can achieve a high rate of income and reduce volatility, it
could definitely see some solid interest, especially if it can
justify its higher expense ratio to cost-conscious investors.
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Follow @Eric Dutram on Twitter(FPE): ETF Research ReportsISHARS-SP PFD S (PFF): ETF Research ReportsPWRSH-FIN PFD (PGF): ETF Research ReportsPWRSH-PFD PORT (PGX): ETF Research ReportsTo read this article on Zacks.com click here.Zacks Investment
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