The financial sector’s rally to start the year has provided a boost to exchange traded funds tracking preferred stock, which already pay hefty yields.

The $7.2 billion iShares S&P U.S. Preferred Stock (NYSEArca: PFF) has jumped nearly 4% over the past week. The ETF is yielding about 7%. [Search for Yield Leads Some to Preferred Stock ETFs]

Other funds in the category include PowerShares Financial Preferred (NYSEArca: PGF), PowerShares Preferred (NYSEArca: PGX) and SPDR Wells Fargo Preferred Stock (NYSEArca: PSK). [Preferred Stock ETFs Lure Yield Hunters]

The funds have benefited from their heavy concentration in the financial sector, which is off to a strong start in 2012.

For example, iShares S&P U.S. Preferred Stock has about 80% in the sector, which includes financial institutions, banks, and insurance and real estate companies. The recent rally has pushed the ETF above its 200-day exponential moving average, a bullish development.

Some investors have gravitated to preferred stock ETFs in their search for yield in a low-rate environment.

The asset class “could make sense for an income investor looking for a little extra yield and willing to take on the risks embedded in moving down the capital structure from debt to do so,” explains Morningstar analyst Timothy Strauts.

“Preferreds are hybrid securities that have characteristics of both stocks and bonds, and are typically issued by financial institutions, utilities, and telecom firms. It makes regular income payments and is rated by the major credit-rating agencies,” he wrote in an analyst report on iShares S&P U.S. Preferred Stock. “Preferreds have no voting rights, are senior in the capital structure to common stock, and have priority over common stock in the payment of dividends.”

iShares S&P U.S. Preferred Stock

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