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Preferred Stock ETFs Took Hits In 2013 On Rate Fears

By: Investor's Business Daily
Posted: 12/30/2013 5:32:00 PM
Referenced Stocks: PFF;PGF;PGX

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.