ETF Trends
ETF Trends

In the ongoing search for yields in an extended low-rate environment, investors have turned to preferred stock exchange traded funds as an attractive alternative investment, with the VanEck Vectors Preferred Securities ex Financials ETF (NYSEArca: PFXF) standing out among its competitors.

PFXF has outperformed its peers, rising 12.2% year-to-date, and generated an attractive 5.62% 12-month yield to boot.

In contrast, the iShares S&P US Preferred Stock Index Fund (NYSEArca: PFF), the largest preferred stock ETF, returned 5.9% so far this year. PFF also comes with a robust 5.74% 12-month yield.

Income investors have included preferred stock ETFs in their portfolios for a number of reason. For example, the asset class offers stable dividends, doesn’t come with taxes on qualified dividends for those that fall into the 15% tax bracket or lower, is senior to common stocks in the event liquidation occurs, is less volatile than bonds and provides dividend payments before common shareholders.

“Income has been a good, big theme this year,” Ed Lopez, marketing director at Van Eck Global, told ETF Trends in a call.

Related: Yellen Cements Low Rate Theme, Off-Beat ETFs To Consider

Preferred stocks are a type of hybrid security that show bond- and equity-like 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. Additionally, preferred stocks issue dividends on a regular basis, but investors don’t usually enjoy capital appreciation on par with common shares.

The VanEck Vectors Preferred Securities ex Financials ETF specifically tries to reflect the performance of the Wells Fargo Hybrid and Preferred Securities ex Financials Index, which only follows non-financial preferred securities.

“Index excludes traditional financial companies which have been more volatile than other sectors in recent years,” according to VanEck.

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Nevertheless, PFXF does include a 31.1% tilt toward real estate investment trusts and the rest of the portfolio is comprised of utilities, industrials, materials, health and consumer names.

However, while preferred stocks provide investors with an attractive source of yields, the assets are vulnerable in a rising interest rate environment. If rates rise, the holdings must decline in price to elevate their yield to attractive levels. Furthermore, most preferred stocks are either perpetual or long-dated, which exposes investors to significant interest-rate risk.

Related: Preferred ETFs Still A Relevant Income Destination

While the Federal Reserve has maintained a low-rate policy in light of slowing economic growth and global uncertainty, investors will be watching closely for the Federal Open Market Committee meeting’s announcement next week on July 25.

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VanEck Vectors Preferred Securities ex Financials ETF