Van Eck Global, the New York-based fund provider behind the Market Vectors ETFs, today rolled out a preferred stock ETF that excludes financials, the latest that caters to investor demand for income opportunities, but the first to do so without exposure to the financial sector.
The Market Vectors Preferred Securities ex Financials ETF (PFXF) tracks the Wells Fargo Hybrid and Preferred Securities ex-Financials Index, a rules-based benchmark comprising convertible or exchangeable nonconvertible preferred securities listed on U.S. exchanges, according to a recent prospectus .
Preferred stock ETFs are essentially fixed-income strategies because of the securities’ hybrid nature:They behave both as equity and as debt. Their appeal is that preferred stocks are known for their reliable, steady dividend payments. What’s more, they take precedence over common stocks in a company’s capital structure, and they usually serve up higher income potential than common stocks.
Their hybrid nature also allows them to be purchased at par and offer income, to be listed on an exchange, and at times have their distributions treated as dividend income for tax purposes—much like a common stock’s would.
It’s no surprise that preferred-stock ETFs have done so well with investors, particularly at a time of increased market volatility and with interest rates near all-time lows.
Funds like the iShares S'P U.S. Preferred Stock Index Fund (PFF)—one of the market’s largest preferred-stock ETFs, with $9.3 billion in assets—and the $1.8 billion PowerShares Preferred Portfolio (PGX) speak to that investor demand.
But PFXF is different from its competitors because it’s the first to bypass financials completely as it looks to minimize exposure to volatility. PFF and PGX are broader in scope, and are, in fact, heavily tilted toward financials.
PFXF is also coming into the space with one of the lowest net expense ratios among its peers, currently pegged at 0.40 percent. PFF and PGX cost 0.48 percent and 0.50 percent, respectively.
The benchmark underlying PFXF has an average current yield of 6.78 percent, according to data provided by Van Eck. REITs represent more than 30 percent of the portfolio. Issues in the fund also include securities from utilities, auto manufacturers and telecommunications, the company said.
The fund will also have holdings that are functionally equivalent to preferred securities, such as convertible securities, depository preferred securities and perpetual subordinated debt, according to data provided by Van Eck.
Van Eck noted that nonfinancial preferred stocks are serving up nearly identical yield potential to financial-linked ones, but have seen about half as much volatility as measured by a three-year annualized standard deviation.
PFXF expects to pay dividends monthly.
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