Exchange traded funds that track preferred shares have been popular in recent years with income-starved investors, but the ETFs have pulled back over the past month along with the stock market.

Preferred shares and ETFs that invest in them had been performing well before June’s slide.

The $7.9 billion iShares S&P U.S. Preferred Stock Index Fund (NYSEArca: PFF) was up 4.1% year to date as of June 10, according to Morningstar.

The ETF had a 30-day SEC yield of 5.6% at the end of May, according to manager BlackRock.

Preferred shares usually have higher dividends but don’t carry voting rights. They also take priority over common stock in a company bankruptcy.

The iShares ETF has a heavy concentration in the financial sector at about 85% of the portfolio.

The fund “could be an appropriate satellite holding for income investors who are looking for a little extra yield and are willing to take on the risks embedded in moving down the capital structure from debt to do so,” says Morningstar’s Timothy Strauts in an analyst report on the ETF.

“Preferred stocks are exposed to interest-rate risk like most any other fixed income. A rise in interest rates will cause the price of these securities to drop,” he added.

Other ETFs in the category include PowerShares Financial Preferred (NYSEArca: PGF), PowerShares Preferred (NYSEArca: PGX) and SPDR Wells Fargo Preferred Stock (NYSEArca: PSK).

iShares S&P U.S. Preferred Stock

Tisha Guerrero contributed to this article.

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.

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