“Much like bonds, preferred stock becomes less attractive in a rising-rate environment, so [preferred stock ETFs’]holdings must decline in price to bring their yield up to an attractive level,” according to Morningstar analyst Abby Woodham. “Most preferred stock is either perpetual or extremely long-dated, which exposes investors to significant interest-rate risk.”
For instance, when the benchmark yields on 10-year Treasuries spiked from 1.63% to almost 3.0% between May and September last year, PFF declined 7.3% and PGX decreased 8.7% over the same period.
Preferred stock ETFs are notably sensitive to rate changes due to their heavy allocation toward perpetual preferreds, which have no maturity date, or perferreds with extremely long maturity dates. Woodham points out that perpetual preferreds make up almost half of PFF’s holdings and over half of PGX’s components.
For more information on preferred stocks, visit our preferred stocks category.
Max Chen contributed to this article.