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.
Rising rates have also thwarted new and unique approaches to preferred ETFs. The Market Vectors Preferred Securities ex Financials ETF (NYSEArca: PFXF) is off more than 8% this year, though it should be noted that fund has brought in $37.4 million in fresh capital. PFXF, unlike rival funds, is not heavily allocated to the financial services sector.
The actively managed First Trust Preferred Securities and Income ETF (NYSEArca: FPE) is comprised of preferred and hybrid securities based on relative yield, credit quality, capital structure, credit ratings, credit fundamentals, security characteristics, liquidity, market conditions and interest rate environment. FPE is off to a decent start with almost $54 million in AUM, but has shed 10.5% since its February debut. [An Active ETF for Preferred Shares]
iShares U.S. Preferred Stock ETF
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of PGF.