Preferred Stock ETFs Offer High Yields But Mind The Rate Risk | Page 2 of 2 | ETF Trends

Moreover, investors need to be aware that preferred stock ETFs have a heavy exposure to the financial sector. PFF allocates 37.2% to diversified financials, 28.2% to banks and 10.2% to insurance companies.

Alternatively, the PowerShares Preferred Portfolio (NYSEArca: PGX) employs a credit screen, so component holdings have a higher credit quality than other preferred ETFs. The financial services sector also looms large in the fund, accounting for 87.9% of its holdings. PGX has a 0.5% expense ratio and shows a 6.41% 12-month yield, The ETF is up 5.2% year-to-date. [Preferred Stock ETFs Yielding 6% Still Chugging Along]

The SPDR Wells Fargo Preferred Stock ETF (NYSEArca: PSK) takes an even more conservative approach, holding 75.2% in Baa low investment-grade  securities and another 10% in A-rated securities. Financials also make up a heavy portion of the portfolio at 81.1%. PKS has a 7.26% 12-month yield and comes with a 0.45% expense ratio. The ETF is up 7% year-to-date.

Preferred stocks are a type of hybrid security that show bond- and equity-esque characteristics. The shares are issued by financial institutions, utilities and telecom companies, among others. Within the securities hierarchy, preferreds are senior to common stocks but junior to corporate bonds. Preferred stocks issue dividends on a regular basis, but investors are unlikely to enjoy capital appreciation on par with common shares.

For more information on preferred ETFs, visit our preferred stocks category.

Max Chen contributed to this article.