Preferred stocks are among the asset classes getting a lift from declining bond yields this year and the VanEck Vectors Preferred Securities ex Financials ETF (PFXF) is participating in that trend.
Up more than 13%, good for one of best performances among preferred stock ETFs, PFXF seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Wells Fargo Hybrid and Preferred Securities ex Financials Index. The Index is intended to track the overall performance of U.S.-listed preferred securities excluding those with a financial sector classification, including securities that, in Wells Fargo Securities LLC’s judgment, are functionally equivalent to preferred securities such as convertible securities, depository preferred securities and perpetual subordinated debt.
The $744.7 million PFXF holds 125 preferreds and yields 5.30% on a 30-day SEC basis, highlighting its advantages at a time of declining interest rates.
“Historically, a company’s preferred securities have offered higher yield than its common stock or senior debt,” said VanEck in a recent note. “However, with traditional financial companies saturating the market, this traditional scenario is not playing out the way it once had. Targeting preferred securities ex-financials may provide investors with a yield premium, most effectively spent allocating to the broad preferred market in aggregate.”
Like common stock, preferred stock is issued by a company and traded on an exchange. Preferred stock prices can fluctuate, but most of the returns from preferred stock come from dividends. Unlike common stock, preferred stock dividends are predetermined and paid at regular intervals. These dividends are paid in full before any dividends are released to common stockholders.
Excluding financials, as PFXF does, has offered similar yield to the broad preferred securities universe, provided greater diversification since financials make up almost three quarters of the broad preferreds universe and generated lower volatility historically than with financial preferreds.
“Excluding traditional financial companies results in a more diverse sector exposure, relative to the broad preferreds market, and may help reduce sector concentration risk without sacrificing yield,” according to VanEck. “Beyond increased sector diversification, excluding financial issuers also increases the proportion of preferreds paying cumulative distributions in the index and lowers the proportion featuring near-term call dates.”
PFXF offers another benefit: low correlations to stocks, corporate bonds and Treasuries.
“For investors seeking yield in the current low rate environment, preferred securities can potentially offer increased income generation within a portfolio,” said VanEck. “In addition, their low correlations with equities and traditional fixed income instruments can make them a useful diversifier in portfolios. Preferreds can serve as a complement to a portfolio’s core fixed income allocation alongside or in place of high yield debt.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.