Not Just Treasuries: Preferred ETFs Benefit as Rates Fall

ETF Trends

This year’s toast of the town among bond exchange traded funds has been Treasury ETFs, particularly of the longer-dated variety.

As 10-year Treasury yields have plunged 15.6%, investors have raced back to Treasury ETFs, helping the iShares 7-10 Year Treasury Bond ETF (IEF) and the iShares 20+ Year Treasury Bond ETF (TLT) rank among the 10 best asset-gathering ETFs this year. Both ETFs have year-to-date returns well in excess of the S&P 500. [Exotic Treasury ETFs]

Treasury ETFs are not the only bond funds benefiting from lower rates. Preferred stock ETFs have also experienced a renaissance of sorts after being stung by last year’s yield spike. Preferred stocks are a type of hybrid security that show bond- and equity-esque characteristics. The shares are issued by financial institutions, utilities and telecom companies, among others. Within the securities hierarchy, preferreds are senior to common stocks but junior to corporate bonds. Preferred stocks issue dividends on a regular basis, but investors are unlikely to enjoy capital appreciation on par with common shares.

Preferred stocks provide investors with an attractive source of yields. However, as witnessed last year, preferred shares are vulnerable to rising interest rate environments. [Beware of Rate Risk With Preferred ETFs]

Investors are returning to preferred ETFs this year. In just the past week, the iShares U.S. Preferred Stock ETF (PFF) has brought in almost $113 million in new assets and year-to-date, the largest preferred ETF has hauled in $940.6 million in fresh capital, according to ETF.com data.

PFF is not the only preferred stock ETF that has regained investors’ confidence. The SPDR Wells Fargo Preferred Stock ETF (PSK) has brought in almost $11 million this year. Over the past three months, the PowerShares Preferred Portfolio (PGX) has added $98 million in new assets, ranking as the eighth-best PowerShares ETF for assets gained over that time, according to issuer data.

The combination of declining 10-year Treasury yields and still enticing yields on preferred stocks set the stage for the preferred ETF resurgence. IEF features a 30-day SEC yield of 2.2% while the average 30-day SEC yield on PFF, PGX and PSK is 5.8%. [Preferred ETFs Have Tempting Yields]

PFF, PGX and PSK are among the more widely-known preferred ETFs, but the more sanguine interest rate environment has favored some other interesting options.

For example, the Market Vectors Preferred Securities ex Financials ETF (PFXF) has gained $31.7 million, or almost 19%, of its current assets under management total just this year. As its name implies, PFXF, unlike most preferred ETFs, excludes preferreds from financial services issuers. The fund has a 30-day SEC yield of 6.04%.

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