Sector ETFs that have been beneficiaries of investors’ hunger for yield in 2012 such as utilities and junk bonds have stumbled recently on concerns over slowing economic growth, the U.S. fiscal cliff and tax uncertainty. Now investors can add another category to the list: preferred stock ETFs.
The $10.5 billion iShares S&P U.S. Preferred Stock Index Fund (NYSEArca: PFF) is in a three day losing streak and has dropped below its 50-day moving average for the first time in five months. Weakness in high-yield sector ETFs is a sign that investors are moving toward a risk-off stance.
PFF is among the top 10 best-selling ETFs this year with inflows of about $2.8 billion, according to IndexUniverse. [Utilities ETFs Turn Negative for Year on Dividend Tax Worries]
The fund has a 30-day SEC yield of 5.7%, according to manager BlackRock. [High-Yield ETF Falls for Seventh Day]
Through Nov. 14, the preferred stock ETF was up 15.9% year to date, outperforming the 9.9% gain posted by SPDR S&P 500 (NYSEArca: SPY), according to Morningstar. [Preferred Stock ETFs Beating S&P 500 with 6% Yields]
PFF has almost its entire portfolio concentrated in financial institutions in Europe. Data released Thursday showed Europe slipped back into recession in the third quarter.
“Investors must be comfortable with exposure to the sector, including European financials,” according to a Morningstar analyst report on the ETF. “Preferred stock is a hybrid security usually issued by highly leveraged companies, such as financial institutions, telecoms, and utilities. It has characteristics of both bonds and stocks.”
From a technical perspective, Kimble Charting Solutions notes that PFF has broken a support line that has held since August 2011. Some of the recent selling may be related to worries the tax rate on qualified dividends might rise in 2013 following Obama’s re-election. [Dividend ETFs: What Obama Win Means for Tax Rates]
iShares S&P U.S. Preferred Stock Index Fund
Full disclosure: Tom Lydon’s clients own SPY.
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