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A Power Preferred ETF

by
September 30, 2016 2:39 pm
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Preferred stocks and exchange-traded funds are benefiting this year from the Federal Reserve's refusal to raise interest rates, something the U.S. central bank recently passed on.

Like other high-yielding asset classes, preferred stocks and the corresponding ETFs are viewed as negatively correlated to hawkish changes in U.S. borrowing costs. So, it's not surprising that with the Fed standing pat on interest rates, preferred ETFs have been packing on new assets at an impressive clip. Since 2010, investors have added more than $20 billion to preferred ETFs.

Global X SuperIncome Preferred ETF

The Global X SuperIncome Preferred ETF (Global X Funds (NYSE: SPFF) has benefited from that trend and investors' desire for more yield. SPFF, which recently turned four years old, is home to $236.4 million in assets under management.

Related Link: Best Sector ETFs For October

Preferreds can be considered an alternative asset class, implying that these hybrid securities can potentially boost a portfolio's diversity and reduce correlations to other asset classes along with providing higher yields.

“With their unique structure, preferreds can potentially act as an important diversifier for income-oriented portfolios. In the table below, we compare the long-term correlations of preferreds with other major asset classes. Their correlations with all other asset classes included in the chart was less than 0.70 and they demonstrated particularly low correlations with traditional fixed income investments like long-term US treasuries (-0.24) and investment grade corporate bonds (0.17),” according to Global X Research.

The Appeal Of Preferreds

A preferred stock is a type of security that offers characteristics of both bonds and equities. The primary source of allure with preferreds is yield, although preferred shareholders are higher on the totem pole in the event of issuer bankruptcy or default than are common equity holders.

SPFF tracks the S&P Enhanced Yield North American Preferred Stock Index and sports a tempting 30-day SEC yield of almost 6.6 percent. The ETF holds 50 of the highest-yielding U.S. and Canadian preferreds.

Two-thirds of SPFF's holdings are issued by financial services firms while energy and real estate names combine for over 18 percent of the ETF's lineup.

“Given their historically high yields on both a pre-tax and post-tax basis, preferreds offer the potential to increase a portfolio’s income. In addition, their low correlations with equities and traditional fixed income instruments can make them a useful diversifier in portfolio,” added Global X. “Their hybrid equity and bond-like characteristics has led portfolio managers to classify preferreds as fixed income, equities, and alternatives, depending on their preferences. One way to implement a preferred allocation in a portfolio is to replace a portion of one’s less tax efficient high yield debt or one’s lower yielding and tax inefficient investment grade debt.”

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