“While the impact on yield has been negligible, the two-thirds concentration in financial preferreds has had a significant influence on returns,” Meredith Larson, Product Manager at VanEck Vectors ETFs, said in a note. “This concentration may not always be a negative factor, but is one worth considering. For example, the 2008/2009 credit crisis clearly showed the market that when financials sell off, they can do so significantly. In addition, excluding traditional financials allows for greater participation in other sectors, such as energy, utilities, and consumer staples.”
[related_stories]Investors may be focused on the large 30% weight toward REITs in PFXF’s portfolio. The REITs portion helps augment the fund’s yield and the market segment has become a newly minted sector, breaking away from the broader Global Industry Classification Standard (GICS) Financials sector and placed in the new Real Estate sector.
“We believe that this separate sector classification indicates REITs have become a more robust segment of the market,” Larson added. “One positive impact may be increased institutional demand for REITs, as investment managers tend to keep pace with their benchmarks’ sector weightings.”
SEE MORE: REIT ETFs Could Encounter Valuation Concerns
Looking ahead, 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.
Moreover, PFXF’s low financial weight may also be a detriment to the fund in a rising rate environment as the financial sector, notably banks, typically enjoy improved margins on loans and deposits as interest rates rise.
For more information on real estate investment trusts, visit our REITs category.