A Look at Two Preferred Stock ETFs Paying 6%
November 1st 2012 at 8:30am by Tom Lydon
Preferred stock ETFs are on investors’ radar screens this year because the funds have delivered healthy yields and steady performance boosted by the recovery in the financial sector in which they’re concentrated.
When looking at any particular sector, investors usually have several choices when it comes to ETFs. Comparing and contrasting rival ETFs can be a useful exercise.
For instance, the Yieldpig Blog highlighted two preferred stock ETFs, the iShares S&P U.S. Preferred Stock Index Fund (NYSEArca: PFF) and the PowerShares Preferred Portfolio (NYSEArca: PGX). [Preferred Stock ETFs Beating S&P 500 with 6% Yields]
To start off, the iShares ETF tracks the S&P U.S. Preferred Stock Index while the PowerShares fund follows the BofA Merrill Lynch Core Plus Fixed Rate Preferred Scurities Index. As such, investors can expect differences in the holdings between the two indexing methodologies. [Preferred Stocks]
PFF comes with a 0.48% expense ratio, a 5.84% 30-day SEC yield and a 83% allocation toward the financial sector. PGX has a 0.50% expense ratio, a 6.43% 30-day SEC yield and a 91% allocation to financials.
The major differences can be seen through the two indices’ credit rating allocations. About 64% of PGX’s holdings are considered investment grade, or BBB and higher, according to S&P, and 48% are rated Baa or better, according to Moody’s. Meanwhile, only 44% of PFF’s portfolio is BBB or better under S&P ratings and 0.57% is Baa or better, according to Moody’s.
Additionally, PFF had an average beta, or the measure of the investment’s volatility compared to its benchmark, of 0.36, whereas PGX had a three-year beta of 0.23, which is 36% less volatile than PFF, according to the report.
Other ETFs in this category include PowerShares Financial Preferred Portfolio (NYSEArca: PGF), SPDR Wells Fargo Preferred Stock ETF (NYSEArca: PSK), iShares S&P International Preferred Stock Index (NYSEArca: IPFF), Market Vectors Preferred Securities ex Financials ETF (NYSEArca: PFXF), Global X Canada Preferred ETF (NYSEArca: CNPF) and Global X SuperIncome Preferred ETF (NYSEArca: SPFF).
Although preferred ETFs are offering decent yields and have performed well in 2012, investors need to be aware of some risks. Most importantly, many of the funds are concentrated in the financial sector and European banks, so another credit flareup could be a problem. Rising interest rates are another potential risk.
For more information on preferred funds, visit our preferred stock category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own PGF.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.