Income-minded investors have turned to preferred stock exchange traded funds in their ongoing search for yield in a low-rate environment, and among the number of options available, the VanEck Vectors Preferred Securities ex Financials ETF (NYSEArca: PFXF) has stood out among the competition.
PFXF has outperformed its peers, rising 12.5% year-to-date, and produced 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 6.7% so far this year. PFF also comes with a robust 5.74% 12-month yield.
Income investors have looked to preferred stock ETFs in their portfolios for a number of reason. For instance, the asset class offers stable dividends, does not 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.
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.
However, about two-thirds of preferred securities are made up of traditional financial companies, including banks, which have largely unperformed this year.
Unlike competing strategies, PXFX generates the yield potential of preferreds and excludes most financial sector exposure. The preferred securities ex-financial ETF, though, does include a hefty 30.4% tilt toward real estate investment trusts, along with 22.5% electric companies, 16.5% telecom, 4.7% agriculture, 4.1% manufacturing, 4.1% insurance, 3.5% pipelines, 3.4% oil & gas, 2.0% food and 2.0% healthcare.
In contrast, PFF includes a 42.3% tilt toward banks, along with 18.0% diversified financials, 11.0% real estate, 8.9% insurance, 3.5% telecom, 3.3% utilities, 2.8% energy and 2.4% healthcare.