“The bank preferred market has shown lower volatility in both directions — in November 2012 when the overall market was down over 5% mid-month, bank preferreds were only down 2%,” writes Ryan Brennan at Preferred Stock Research. “With a low volatility asset it’s easy to feel like you’ve missed something when the overall market outperforms and everyone quickly forgets the smaller declines to the overall market. Investors need to remember that in the long run, ‘steady as she goes’ is a pretty solid investment thesis.”
Other ETFs for the category include PowerShares Preferred Portfolio (NYSEArca: PGX) and SPDR Wells Fargo Preferred Stock ETF (NYSEArca: PSK).
However, the sector does come with certain risks. “Heavy exposure to financials, regulation changes, and rising interest rates are foremost on this list,” Woodham notes.
“Issuance from various financial companies makes up almost 90% of PFF, so investors worried about the future of the industry should stay away from this asset class. Preferreds are sensitive to interest rates, but unlike bonds, they are at risk in both directions,” the analyst said.
iShares S&P U.S. Preferred Stock Index Fund
Full disclosure: Tom Lydon’s clients own SPY.