The largest ETF for preferred stocks, known for their above-average yields, is trying to break out to the highest level since 2008.

The iShares S&P U.S. Preferred Stock Index Fund (NYSArca: PFF) posted a total return of 18.2% in 2012 to outpace the 16% gain for the S&P 500, according to Morningstar.

For investors, preferred stock ETFs delivered the best of both worlds last year. They saw nice capital appreciation with less volatility, along with a healthy yield.

For example, PFF has a 12-month yield of 6%, according to manager BlackRock (NYSE: BLK). It holds about $11 billion in assets.

The preferred share ETF is trading around $40 a share and a break above $41 would carry the fund to post-financial-crisis highs. [Preferred Stock ETFs with High Yields]

“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,” according to Morningstar analyst Abby Woodham.

However, there are some risks, such as “heavy exposure to financials, regulation changes, and rising interest rates are foremost in this list,” Woodham added.

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