The iShares U.S. Preferred Stock ETF (NYSEArca: PFF), PowerShares Preferred Portfolio (NYSEArca: PGX) and other ETFs holding preferred stocks were stung by rising Treasury yields in 2013.
While not as bad as long-duration bond funds, PFF and PGX have an average 2013 loss of 1.4%. The PowerShares Financial Preferred Portfolio(NYSEArca: PGF) is off 1.6% for the year as 10-year Treasury yields have surged almost 63%.
Investors were quick to pick up preferred stocks as a go-to income generating asset during the recent low rate environment, but because most preferred issues are long-dated, investors are exposed to significant duration risk. That means the allure of preferreds fades as rates rise. [Preferred ETFs Vulnerable to Rising Rates]
It could be more of the same in 2014. Ten-year Treasury yields broke through 3% on Tuesday and while 4% seems a long way, a fair number of economists are forecasting a run to the 3.3%-3.4% area in 2014. Regarding PFF, the “current dividend yield is 6.6%, but the monthly payouts this year varied each month. They added up to $2.43. If an investor had bought shares at 2012’s closing price, the yield would’ve been 6.1%,” reports Paul Whitfield for Investor’s Business Daily.
PFF currently trades just 3% above its 52-week low. The ETF “fell 72% off its high during the 2008 bear market. After recovering, its essentially sideways action involved corrections of 15%, 18% and now 11%,” according to IBD. PGX is trading 7.5% above its 52-week low and 7.3% below its 52-week high. PGX has a 30-day SEC yield of 6.69%.
Rising rates have forced investors to shed some of their stakes in preferred ETFs. PFF and PGF have seen 2013 outflows of $1.69 billion and $131 million, respectively, although PGX has seen inflows of $31 million.