For risk-averse investors, preferred stock ETFs are just what the doctor ordered in 2012. They have outperformed the S&P 500 with less volatility and above-average yields.

In other words, preferred stock ETFs have delivered great risk-adjusted performance this year.

The $10.6 billion iShares S&P U.S. Preferred Stock (NYSEArca: PFF) is the largest ETF in the category by far and sports a yield of about 6%. PFF is one of the top-selling ETFs in 2012 with net inflows of $2.8 billion, according to IndexUniverse.

The fund has posted a total return of 17.2% year to date compared with a gain of 14.3% for SPDR S&P 500 (NYSEArca: SPY), according to Morningstar. However, the preferred stock ETF does concentrate most of its portfolio in Europe.

“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,” writes Morningstar analyst Abby Woodham in a recent report on the preferred stock fund. [Preferred Stock ETFs with High Yields]

“The lion’s share of preferred stock is issued by global financial institutions. PFF’s portfolio is over 85% financials. Investors must be comfortable with exposure to the sector, including European financials,” she adds.

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