February was a volatile month for interest rates and asset
classes traditionally linked to machinations in the bond markets.
The CBOE Interest Rate 10 Year Note (INDEX: TNX) spiked from a low
of 1.67 percent to a high of 2.00 percent last month amid a strong
bid for stocks.
This spike higher in rates led to a selloff in the iShares
Barclays 20+ Yr Treas.Bond (
), Vanguard REIT Index Fund (NYSE:
) and even the Utility Select Sector SPDR ETF (Utilities SPDR (
). However, the asset class that shrugged off this macro-economic
headwind and continued to new highs is preferred stocks.
What Are Preferred Stocks?
Preferred stocks are known as a hybrid instrument that carry
qualities of both equity and debt securities. These shares are
higher on the capital structure than common stock owners and
typically pay a hefty yield, which is where their sensitivity to
interest rates is upheld.
iShares U.S. Preferred Stock ETF
The iShares S&P US Pref Stock Idx Fnd (
) is the largest ETF in this space with over $12.7 billion in total
assets. PFF invests in a diversified basket of over 300 preferred
stocks, which are primarily focused in the financial, banking and
real estate sectors.
PFF has gained 11 percent in total return over the last year and
just recently touched new 52-week highs. This ETF also sports a
30-day SEC yield of 5.61 percent and dividends are paid monthly to
PowerShares Preferred Portfolio
Another strong contender in this category is the PowerShares
). This ETF focuses on a more concentrated mix of 213 preferred
stocks, of which 88 percent are financial-based companies. The
current yield on PGX is 5.90 percent.
PFF carries an expense ratio of 0.47 percent, while PGX is
slightly higher at 0.50 percent.
AmSurg Declares Quarterly Preferred Stock
What Makes Preferred Stock ETFs Unique
One of the distinct qualities of preferred stock ETFs is that
their returns don't mirror a traditional equity or bond index. PFF,
for example, has a beta to the S&P 500 Index (
) of just 0.24. This may be an attractive quality for
income-seekers looking to diversify their portfolio in
non-correlated asset classes.
Disclosure: At the time this article was written, David Fabian
and clients of FMD Capital Management owned PFF.
© 2015 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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