Analyzing the Ups and Downs of Preferred ETFs

The iShares S&P US Preferred Stock Index Fund (NYSEArca: PFF), the largest preferred stock exchange traded fund, and rival preferred ETFs are often viewed as sensitive to interest rate increases.

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.

To PFF’s credit, the ETF is up 4.4% year-to-date and has traded modestly higher following the Federa; Reserve’s first interest rate hike of 2017, which was announced earlier this month. Some active managers are concerned about the size of PFF relative to the preferred market as a whole.

As of March 23, PFF, which is 10 years old, had $17 billion in assets under management, according to issuer data.