Preferred stock ETFs offer easy access to this asset class.
Though most investors constrain their interest to the world of “common” stocks, a big universe of investable assets exists on Wall Street that is harder to see but is comprised of a special class of stock that is in some ways superior. “Preferred stock” is in many ways a hybrid between common stock and corporate bonds. Yields are typically much higher, and in the event of a default, these shareholders are seen as superior to those that hold common stock when the courts look to make investors whole. The share prices of preferred stock tend to be much more stable, however, meaning you don’t participate in rapid upside as you could in conventional equities that go on a hot streak. The long and the short of it is that preferred stocks give you a bit more yield but also a bit less risk than common stock. How do you access these assets? Look no further than these seven preferred stock exchange-traded funds.
iShares Preferred and Income Securities ETF (ticker: PFF)
This iShares fund is the largest dedicated preferred stock ETF out there with more than $19 billion in total assets and average volume close to 4 million shares traded daily. The portfolio is comprised of about 515 total positions, but preferred stock is typically issued by capital-intensive businesses — so financial institutions make up the lion’s share of that list. Specifically, more than 60% of this entire fund is in preferred stock issued by banks and financial service firms like Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM). This may not be a deal breaker, but it’s worth understanding this bias toward financials before diving into PFF.
Current yield: 4.66%
Invesco Preferred ETF (PGX)
This Invesco fund is smaller than the prior iShares offering, but it’s still quite substantial with $7 billion in assets and average volume of nearly 3 million shares traded daily. It has a slightly different makeup than PFF with a more focused list of about 300 total positions and a slightly higher bias toward financials with about 65% of the portfolio in banks and similar companies at present. This is an even less diversified approach than PFF, but it does generate a slightly higher yield — and as you’ll see in the remainder of this list, an emphasis on financials is all but unavoidable in the typical preferred stock fund.
Current yield: 4.96%
First Trust Preferred Securities and Income ETF (FPE)
Another big-time preferred stock ETF is this First Trust offering with about $6.7 billion in assets and average volume that regularly tops 1.5 million shares traded daily. It has nearly 300 total positions, with a familiar bias toward banks and similar firms as the bank and capital market industries represent about half of the portfolio. What makes FPE different, however, is that only about half of total assets are in U.S. companies. Consider that the top position at present is Canadian utility firm Emera (EMRAF) followed by Irish financing firm AerCap Holdings (AER). These firms are similar in tone to the big-name U.S. stocks that make up the other funds, but they add some geographic diversification that some investors may find attractive.
Current yield: 4.64%
Global X U.S. Preferred ETF (PFFD)
With just less than 300 positions in its portfolio and a more modest footprint of just $1.8 billion in assets, this Global X preferred stock ETF may initially seem as a lesser fund not worthy of attention. That said, a few important factors make it stand out from the competition. To begin with, it’s the most diversified across sectors among the preferred stock ETFs listed so far with “only” 56% in financials as of this writing, followed by a 16% chunk in utilities. Also, it has one of the highest yields among any of its sister funds — and one of the lowest expense ratios to boot at just 0.23% annually, or $23 on every $10,000 invested. If you are after a bit more yield and a bit more diversification, then PFFD may be worth a look.
Current yield: 5.15%
Invesco Financial Preferred ETF (PGF)
Of course, diversification may not be high on your list of priorities when you consider that most of these funds are biased toward financials by the nature of the preferred stock universe. If you’re not afraid of a more focused approach to preferreds, then take a look at PGF, which is exclusively focused on the financial sector. This ETF is still substantial, as it’s a nearly $2 billion fund that averages roughly half a million shares traded daily, so investors aren’t sacrificing liquidity to get this level of specificity with preferred stock ETF exposure. And, thanks to its focus on banks and financial services, the fund squeezes out a slightly higher yield than some of the other options on this list.
Current yield: 4.86%
VanEck Vectors Preferred Securities ex Financials ETF (PFXF)
Swinging the other way entirely is this VanEck fund that looks to carve out financials altogether and simply focus on preferred stock outside of that leading sector. U.S. utilities, real estate firms and telecom stocks make up most of the top positions, but you’ll also find oddballs and industrial stocks like European steelmaker ArcelorMittal (MT). Investors should keep in mind that the elimination of financials — particularly the multinational Wall Street megabanks — means this fund is more “cyclical” in nature and could see disruptions if the economy rolls over. Remember, as explained earlier, that preferred stock is subordinated to bonds in the event of a default. That said, a little more risk can come with a reward when it comes to the fund’s generous yield.
Current yield: 4.57%
Virtus InfraCap U.S. Preferred Stock ETF (PFFA)
The smallest of the funds as measured by assets and volume, PFFA comes in at around $400 million and only 200,000 or so shares traded daily. This is much more modest than some of the other funds on this list, but it’s still substantial and liquid enough to be worth a look. What makes PFFA stand apart from the others, too, is that its huge yield is more than five times that of the S&P 500 index of the largest common stocks in the U.S. Investors don’t get a big-name money manager behind this preferred stock ETF like some of the other funds, and it’s one of the most focused portfolios at only 160 or so total positions. PFFA also comes with a considerably high expense ratio of 1.47%. If you want yield above all other considerations, though, PFFA could be worth a look.
Current yield: 7.6%
Seven preferred stock ETFs to buy now:
— iShares Preferred and Income Securities ETF (PFF)
— Invesco Preferred ETF (PGX)
— First Trust Preferred Securities and Income ETF (FPE)
— Global X U.S. Preferred ETF (PFFD)
— Invesco Financial Preferred ETF (PGF)
— VanEck Vectors Preferred Securities ex Financials ETF (PFXF)
— Virtus InfraCap U.S. Preferred Stock ETF (PFFA)
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