Markets have seen a soft start to the year, thanks to concerns
related to economic recovery and emerging markets. Though major
indices receovred last week, they have failed to deliver positive
returns so far since the start of the year. (read:
3 Low Risk ETFs for a Stormy Market
The Fed has trimmed asset purchases twice since December last
year. Though the gradual withdrawal of monetary stimulus is
definitely a matter of concern, unsupportive economic data
including two months of back to back weak U.S. job growth is
making investors jittery about the rosy picture projected
Also, an uninspiring earnings outlook from most of the companies
for this year has added to the woes, making investors believe
that last year's party is now over and the markets are due for
some correction now.
Not only are things unpleasant here, China, the world's second
largest economy, is currently faced with a shadowy financial
market and concerns related to growth. (read:
China ETFs Struggle on Weak Data, Bailout
Also, the axe on stimulus has not spared the emerging markets.
These countries are witnessing an outflow of cheap foreign money,
causing their currencies to see the worst fall in five years.
Interest Rates Plunging
Surprisingly, the turmoil in the emerging markets has led to a
dip in U.S. interest rates, even in the face of the Fed taper.
Investors in emerging market nations are fleeing their risky
securities for safe haven U.S. T-Bills. This massive surge in
demand for safe haven investments has sent interest rates
southward. In fact, the rates on the benchmark 10-year government
bond have fallen to 2.7%, 30 basis points lower than the rate
seen at the beginning of January.
Rock bottom interest rates have precipitated demand for high
yielding investment avenues. Though there are quite a few
options, the current combination of falling rates and higher
equity risks makes investing in preferred stocks as one of the
most favored spots. (read:
3 Bond ETFs Surging as Interest Rates Tumble
Preferred Stock ETFs in Focus
Not only do the preferred stocks offer considerably higher
yields, they also provide an opportunity for capital
appreciation. They are hybrid securities having the
characteristics of both debt and equity. The preferred stocks pay
the stockholders a fixed, agreed-upon dividend at regular
intervals, like bonds.
Preferred stocks are thus quite stable and generally have a low
correlation with other income generating segments of the market
like REITs, MLPs, corporate bonds and TIPs. (
Are Preferred Stock ETFs Worth the Risk?)
Though investors can buy individual companies' preferred stocks,
buying preferred stock ETFs can be a very convenient way to
invest in a basket of diversified companies at a low cost.
Below we have highlighted three ETFs, which not only offer
substantial yields but also provide good opportunity for capital
iShares U.S. Preferred Stock ETF (
The fund is the most popular preferred stock ETF in its space
with an assets base of around $8.5 billion. The fund has a very
attractive payout, with the 30-day SEC yield at 6.26%.
PFF tracks the S&P U.S. Preferred Stock Index, holding 316
securities in its basket. Though well diversified as far as
individual stocks are concerned, the fund has some concentration
risks related to sectoral allocation. More than 70% of the fund
assets are allocated towards financials (banks, financial
services and insurance).
However, the fund is pretty liquid, with daily volume exceeding
1.7 million shares a day. The fund charges 48 basis points as
fees to investors.
HSBC Holdings plc (2.63%), GMAC Capital Trust I (1.88%) and
Barclays Bank plc (1.75%) are the top three holdings of the fund.
Complete Guide to Preferred Stock ETF
Though a spike in Treasury rates was a drag for this fund and it
lost 7.3% in 2013, the fund has added a decent 3.8% since the
start of the year.
PowerShares Preferred Portfolio (PGX)
Another fund targeting the preferred stock space is PGX. The fund
holds a portfolio of 192 preferred stocks in its basket, tracking
the BofA Merrill Lynch Core Plus Fixed Rate Preferred Securities
The fund is well spread out among individual stocks, as no single
stock holds more than 4.01% of the total fund assets. Like PFF,
financials dominates this fund as well, with energy, consumer
discretionary and materials having less than 0.5% exposure in the
Barclays Bank plc (4.01%), HSBC Holdings plc (3.11%) and Morgan
Stanley Capital Trust VII (3.09%) are the top three holdings
With the 30-day SEC payout yield of 6.46%, the fund too to is a
solid income destination.
The fund has returned 4.3% in 2014.
PowerShares Financial Preferred Portfolio
Launched in December 2006, PGF tracks the Wells Fargo Hybrid and
Preferred Securities Financial Index, managing a fund size of
Holding 73 preferred stocks in its basket, the fund provides an
exposure to U.S. listed securities issued by financial
institutions. (see all
Convertibles/CEFs/Preferred Stock ETFs
The fund seems to contain some concentration risks as the top ten
holdings form around 40% of the total fund assets.
Like its above mentioned counterparts, the fund too has a notable
30-day Sec yield of 6.32%. Though PGF lost 7.78% in 2013,
it is up 3.6% since the start of the year.
There has been an important
in the preference of asset classes this year. While equities were
the most sought after by investors in 2013, they are now
abandoning these risky asset classes and changing their portfolio
Given moderate GDP growth, low inflation and subdued interest
rates, preferred stocks are certainly expected to be on the
investors' favorite list this year. Investors should however keep
in mind that the high payout from this asset class does not come
without its own share of risks.
Preferred stocks carry the risk of regulation changes, higher
interest rates and heavy concentration in financials. As
such, investors should carefully analyze the risk-reward
characteristics of the above mentioned funds and then decide
which fund best fits their investment objective.
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ISHARS-US PFD S (PFF): ETF Research Reports
PWRSH-FIN PFD (PGF): ETF Research Reports
PWRSH-PFD PORT (PGX): ETF Research Reports
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