ETFs tracking preferred shares such as iShares U.S. Preferred Stock (NYSEArca: PFF) were in focus Monday after a weekend story from Barron’s warned the funds could get hit by rising interest rates.
Preferred stock ETFs have been popular with investors looking for yield and stability in a low-rate environment for bonds.
PFF is the largest ETF in the category with $12.3 billion in assets.
Last year the fund posted a total return of 18% to beat the S&P 500 and junk bond ETFs such as iShares iBoxx $High Yield Corporate Bond (NYSEArca: HYG) and SPDR Barclays High Yield Bond (NYSEArca: JNK).
“Money has been chasing those strong returns: The iShares fund took in $4.2 billion last year and has attracted another $1.3 billion so far this year,” writes Chris Dieterich for Barron’s.
PFF has a 30-day SEC yield of 5.62%, according to manager BlackRock (NYSE: BLK).
“It’s hard to pass up a yield of 6% these days, so it’s little wonder investors have flooded into exchange-traded funds focusing on preferred stock. But many of these ETFs could end up hamstrung when rates start to rise,” Dieterich said.
Next page: Other risks for preferred stock ETFs