Weathering the Storm in Preferred ETF's (PFF, PGF, PGX)
In these uncertain environments and with bond yields at record lows, investors should consider looking at preferreds as an alternative to their portfolios, in hopes of finding better yields. Thus, I have found three preferred ETF's that are currently yielding over 6% that investors may consider adding to their portfolios.
First, is the iShares S&P US Preferred Stock Index Fund (NYSE: PFF). However, before investors even consider preferreds, remember that most preferreds outstanding are financials. Thus, there is a risk in these that, if financial crisis fears erupt once again, these could sell off. But, as preferreds are senior to common equity, it will take a significant financial shock to cause this. PFF has over 84% of its holdings in financial companies (diversified financials, banks, insurance, and real estate), but this isn't terrible, so long as investors understand these risks. The securities are generally highly rated, with 78.5% of the assets are rated BB or better by S&P. With a current yield of 6.07%, this may be a place to hide out.
For investors who would like a purely financial portfolio of preferreds, consider the PowerShares Financial Preferred Portfolio (NYSE: PGF). With a current yield of 6.95%, it is yielding roughly 4.6x the 10-year treasury bond. With 75% of the assets rated BBB or better by S&P, this might be a good alternative to investors who do not mind the excess risk of a pure financial play. What is interesting is that a portfolio of financials is actually less risky, as rated by S&P, than a portfolio of mostly financials, but that's the way the cookie crumbles.
Lastly, the PowerShares Preferred Portfolio (NYSE: PGX) offers investors a third alternative. Currently yielding 6.59%, this ETF can also help investors capture yield. With 95% of the assets rated BB or better by S&P, this ETF provides a third alternative for investors fishing for income.
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