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Preferred Stock ETFs Press Higher, Ignore Interest Rate Spike

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Preferred Stock ETFs Press Higher, Ignore Interest Rate Spike
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February was a volatile month for interest rates and asset classes traditionally linked to machinations in the bond markets. The CBOE Interest Rate 10 Year Note (INDEX: TNX) spiked from a low of 1.67 percent to a high of 2.00 percent last month amid a strong bid for stocks.

This spike higher in rates led to a selloff in the iShares Barclays 20+ Yr Treas.Bond (ETF) (NYSE: TLT), Vanguard REIT Index Fund (NYSE: VNQ) and even the Utility Select Sector SPDR ETF (Utilities SPDR (ETF)) (NYSE: XLU). However, the asset class that shrugged off this macro-economic headwind and continued to new highs is preferred stocks.

What Are Preferred Stocks?

Preferred stocks are known as a hybrid instrument that carry qualities of both equity and debt securities. These shares are higher on the capital structure than common stock owners and typically pay a hefty yield, which is where their sensitivity to interest rates is upheld.

iShares U.S. Preferred Stock ETF

The iShares S&P US Pref Stock Idx Fnd (ETF) (NYSE: PFF) is the largest ETF in this space with over $12.7 billion in total assets. PFF invests in a diversified basket of over 300 preferred stocks, which are primarily focused in the financial, banking and real estate sectors.

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PFF has gained 11 percent in total return over the last year and just recently touched new 52-week highs. This ETF also sports a 30-day SEC yield of 5.61 percent and dividends are paid monthly to shareholders.

PowerShares Preferred Portfolio

Another strong contender in this category is the PowerShares Preferred Portfolio(ETF) (NYSE: PGX). This ETF focuses on a more concentrated mix of 213 preferred stocks, of which 88 percent are financial-based companies. The current yield on PGX is 5.90 percent.

PFF carries an expense ratio of 0.47 percent, while PGX is slightly higher at 0.50 percent.

Related Link: AmSurg Declares Quarterly Preferred Stock Dividend

What Makes Preferred Stock ETFs Unique

One of the distinct qualities of preferred stock ETFs is that their returns don’t mirror a traditional equity or bond index. PFF, for example, has a beta to the S&P 500 Index (INDEX: SPX) of just 0.24. This may be an attractive quality for income-seekers looking to diversify their portfolio in non-correlated asset classes.

Disclosure: At the time this article was written, David Fabian and clients of FMD Capital Management owned PFF.

Posted-In: Barclays ishares SPDR vanguardSector ETFs Specialty ETFs Trading Ideas ETFs Best of Benzinga

 

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