Preferred Stock ETFs

Investors in preferred stock ETFs would be hard-pressed to find a reason to complain. Over the past year the sector has consistently delivered solid performance, high yields and low volatility.

The iShares S&P U.S. Preferred Stock Index Fund (NYSEArca: PFF) is the largest ETF in the category and pays a 12-month yield of 6%. Preferred shares are hybrid securities that combine the features of stocks and bonds.

PFF and other preferred stock funds have so far has been relatively immune to the recent pullback in other high-yielding ETFs such as junk bonds and emerging market debt. [High-Yield, Emerging Market Bond ETFs Lead Outflows]

The fund has delivered a total return of more than 10% for the trailing year, and with very low volatility to boot.

“With yield so scarce today, investors are branching out into different asset classes in the search for income. Preferred stock can be a high-yielding addition to a diversified income-seeking portfolio,” writes Morningstar analyst Abby Woodham in a profile of PFF.

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

For example, PFF has a three-year standard deviation of 8.5, a little more than half the 15.2 standard deviation for SPDR S&P 500 (NYSEArca: SPY), according to Morningstar.