Prior to Monday's market rally, fears of the fiscal cliff had
been wreaking havoc on even the most conservative dividend-paying
sectors. In the process, even stodgy
telecom and utilities ETFs were taken to the
With concern running high that a higher dividend tax rate
could prompt many companies to forgo dividend increases, the
negative price action for these dividend sectors was
understandable. Worse yet, that negativity was widespread
throughout the universe of decent-to-high yield securities.
In other words, it was not surprising to see
tracking preferred stocks get caught in the downdraft. Take the
case of the $10.5 billion iShares S&P U.S. Preferred Stock
Index Fund (NYSE:
). PFF has a 30-day SEC yield of 5.71 percent and a beta against
the S&P 500 of just 0.46,
according to iShares data
. Those are two factors that have almost certainly increased the
allure of this ETF in a yield-starved environment.
However, those traits did not prevent the fund from tumbling
as fiscal cliff fears rose. The problem: Probably and excessive
weight to financial services stocks. In the case of PFF, various
financial services names account for approximately 85 percent of
the fund's weight.
PFF's exposure to European banks has made matters all the more
difficult recently, but the struggles of this ETF and its rivals
obfuscate a critical fact. That being the hybrid nature of
preferred stocks. Preferred stocks are not common stocks, nor are
they completely debt products either. Rather, preferred stocks
share traits of both bonds and common stocks.
The "a ha" moment as it pertains to the fiscal cliff comes
from realizing that a company that is paying a preferred dividend
had bigger make that payment or risk damage to its credit rating.
There is one of the bond aspects of
A company that is consistently in arrears on preferred dividend
payments risks a lower credit rating and that leads to higher
borrowing costs. The way of explaining this scenario to a
second-grader is: "Even if the fiscal cliff comes to pass, why
would any company risk damage to its credit rating just because
the dividend tax went up?" It is not a good trade.
With that in mind, here are some of the more obscure preferred
stock ETFs that might prove durable even in a post-fiscal cliff
Global X Canada Preferred ETF (NYSE:
The Global X Canada Preferred ETF is the first ETF devoted to
Canadian preferred stocks, an asset class that should prove
desirable because Canadian banks are far less controversial than
their U.S. counterparts. That does lead into an important point
and that is CNPF is not all that different from a U.S.-focused
preferred ETF in that financials account for over 70 percent of
this ETF's weight.
Energy and telecom names represent most of the rest of CNPF's
sector allocations. The thesis here is simple: International
have shareholders in other countries that will
not be affected by the fiscal cliff
. Meaning international dividend ETFs, of which CNPF is one,
could prove to be an excellent fiscal cliff survival tool. Plus,
CNPF pays a monthly dividend.
PowerShares Preferred Portfolio (NYSE:
No, it is not fair to refer to an ETF with over $2 billion in
assets under management as "obscure," but the PowerShares
Preferred Portfolio is somewhat overlooked in comparison to some
of its larger rivals. PGX amounts to a good news/bad news type of
ETF. Follow along.
Good news: 30-day SEC yield of 6.52 percent. Bad news: More
than 91 percent allocated to financials. Good news: PGX pays a
monthly dividend. Bad news: A third of the ETF's holdings have
non-investment grade ratings. The good news is that PGX can be
summed up with two positive tidbits investors need to
acknowledge. The overall credit quality of its portfolio is
superior to that of PFF's and the ETF's beta is far below that of
its iShares rival.
Market Vectors Preferred Securities ex Financials ETF
The Market Vectors Preferred Securities ex Financials ETF is a
case study in how a new ETF that is entering an arena fraught
with competition can be successful. Following its July debut,
PFXF has $92.3 million in AUM and those inflows have likely been
driven by two simple factors. First, PFXF has an expense ratio of
0.4 percent, meaning it is the cheapest preferred ETF on the
Second, the fund is not excessively weighted to bank stocks.
The exclusion of traditional banking names means a less volatile
fund. Simply put, PFXF is doing something right. Since its debut,
the fund has outperformed all of the other ETFs highlighted
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