Preferred stock ETFs may be an overlooked sector for investors combing the markets for yield and income. Despite stumbling immediately after the U.S. presidential election, preferred share ETFs have recovered and are trying to break out to their highest levels since 2008.
Investors looking for yield might want to take a gander at SPDR Wells Fargo Preferred Stock ETF (NYSEArca: PSK), writes David Zanoni at Seeking Alpha.
The fund holds $311 million in assets and pays a current yield of 6.5%, according to manager State Street (NYSE: STT). It charges an expense ratio of 0.45%.
The preferred stock ETF has posted a total return of 13.4% this year, according to Morningstar. [High-Yielding Preferred Stock ETFs Falter]
“The dividends of preferred shares are typically higher than the equivalent common shares. However, the preferred shareholders do not have voting rights,” Zanoni explains. “One advantage of preferred shares is the fact that they have less volatility as compared to common stock. This is important for those investors seeking a high yield without experiencing high volatility in the underlying shares.”
PSK is heavily tilted to the financial sector with 81.9% of the portfolio allocated there, according to State Street. The ETF has about 6.2% in utilities.
“Investors should be aware that dividends for preferred shares are taxed as income. This is something to keep in mind, depending on the investor’s tax bracket and how the fiscal cliff resolution plays out,” Zanoni points out. [Preferred Stock ETFs for Fiscal Cliff Defense]
The iShares S&P U.S. Preferred Stock Index Fund (NYSEArca: PFF) is the sector’s largest ETF with assets of more than $10 billion. It has an expense ratio of 0.48% and a 12-month yield of 5.7%, according to sponsor BlackRock (NYSE: BLK).
“Preferred stock is a surprisingly good diversifier: it has low correlation to other income-generating asset classes like REITs, MLPs, corporate bonds, TIPS, and popular income ETFs,” Morningstar says in a report on PFF.
Preferred shares are hybrid securities that combine the features of stocks and bonds. “PFF is not without its headwinds; in fact, there are many significant risk factors investors must consider. Heavy exposure to financials, regulation changes, and rising interest rates are foremost in this list,” according to Morningstar.
Other ETFs in this category include PowerShares Preferred Portfolio (NYSEArca: PGX), PowerShares Financial Preferred Portfolio (NYSEArca: PGF), 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).
SPDR Wells Fargo Preferred Stock ETF
Full disclosure: Tom Lydon’s clients own PGF.