A Big Change for a Popular Preferred ETF

One of the biggest reasons investors like preferred stocks and the corresponding exchange traded funds, such as the PowerShares Preferred Portfolio (NYSEArca: PGX) is yield. Put simply, preferreds and the ETFs that hold them usually sport far higher yields than are found on standard bond investments, but for PGX, that is changing.

However, the change is not a negative. It simply results in a smaller yield on the ETF. PGX, which is over nine years old, tracks the BofA Merrill Lynch Core Plus Fixed Rate Preferred Securities Index. The ETF holds 251 preferred stocks.

“A key measure of the yield for the exchange-traded fund’s underlying index plunged by nearly 3 percentage points on March 22. The change came because the index switched the way it calculates the metric known as yield to worst, which indicates the investor’s income from the fund in a worst-case-scenario,” reports Carolina Wilson for Bloomberg.

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.