For example, PFF is heavily concentrated in the financial sector, including European banks.

Preferred shares pay higher dividends but don’t carry voting rights.

“Low correlations to other income assets make preferred stock a surprisingly good portfolio diversifier. The yield of preferred stock ETFs is almost unmatched on a risk-adjusted basis,” the Morningstar analyst notes.

PFF has a three-year standard deviation of 8.5 compared with 15.2 for SPDR S&P 500 ETF (NYSEArca: SPY).

Of course, preferred stock funds are not without risks – large stakes in the financial sector are an obvious one. Other risks include potential regulatory changes, rising interest rates, issuer bankruptcies and limited opportunities for capital appreciation, Woodham points out.

iShares S&P U.S. Preferred Stock Index

Full disclosure: Tom Lydon’s clients own PFF.

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