Preferred Stock ETFs Took Hits In 2013 On Rate Fears

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Preferred-stock ETFs took hits in 2013, vs. hefty gains in the major stock indexes.

The exchange traded funds built on preferred stocks on average have fallen about 10%. Market watchers attribute the poor price performance in 2013 to expectations surrounding the Federal Reserve's tapering of its bond-buying program.

Even if investors take Fed chief Ben Bernanke at his word, they have a problem forecasting rates. Over the past few years, the Fed has suggested that it would keep interest rates low at least through mid-2013, then late 2014, then mid-2015 and now late 2015.

Meanwhile, the 10-year Treasury note's yield hit 3% Friday, up from 1.76% at the end of 2012.

A look at how preferred-stock ETFs have performed in recent years might be useful. Only three ETFs have been around long enough to offer six to eight years of data.

TheiShares U.S. Preferred Stock ( PFF ) is the most liquid of the preferred ETFs. The average daily dollar volume is about $62 million, which keeps the bid-ask spread tight. That means even a big investor can get in or out of the pool without creating much of a wave.

The current dividend yield is 6.6%, but the monthly payouts this year varied each month. They added up to $2.43. If an investor had bought shares at 2012's closing price, the yield would've been 6.1%. The big sector weightings are: diversified, 37%; banks, 28%; real estate, 12%; and insurance, 10%.

U.S. Preferred fell 72% off its high during the 2008 bear market. After recovering, its essentially sideways action involved corrections of 15%, 18% and now 11%. The ETF recently made a 52-week low.

PowerShares Preferred Portfolio ( PGX ) andPowerShares Financial Preferred Portfolio ( PGF ) are heavy on financials and are on the thin side. The current annual yields are 6.8% and 6.6%.

The corrections have been similar to U.S. Preferred's. Both are 10% to 11% off highs.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Personal Finance , Investing Ideas

Referenced Stocks: PFF , PGF , PGX

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