Income investors are well aware of the benefits of using preferred stocks in their portfolio to generate dividends and capital appreciation. These hybrid instruments have characteristics of both equity and debt in that they pay a fixed coupon but are higher on the capital structure than common stock holders.
The tailwind from the stock and bond markets in 2014 has been a perfect recipe for preferred stocks to shine. A number of ETFs have taken advantage of this environment.
The largest fund in this space is the iShares U.S. Preferred Stock ETF (NYSE: PFF), which has over $11 billion in total assets. This ETF holds 330 preferred securities that are primarily weighted towards large banking and financial institutions. Other smaller sectors that are included in PFF include real estate, utilities and telecommunication companies.
Related Link: The Best Bond ETF Of 2014
With just a couple trading days left in the year, PFF has achieved a total return of nearly 14 percent (with dividends included). The current 30-day SEC yield of this ETF is 5.60 percent and dividends are paid monthly to shareholders.
While those returns are excellent, the PowerShares Financial Preferred Portfolio (NYSE: PGF) has been one of the strongest ETFs in this group with a gain of over 7 percent in 2014. PGF has over $1.4 billion invested in a diversified basket of 86 holdings from a variety of financial industries. This ETF also has a slightly higher yield of 5.93 percent as well.
Lastly, the Market Vectors ETF Trust (NYSE: PFXF) has capped off 2014 with powerful momentum as well. This unique ETF takes a different spin on the preferred space by excluding financial companies from its index. The end result is a far different basket of securities that focus heavily on REITs, electric utilities and telecom companies.
PFXF has a yield of 5.92 percent, expense ratio of 0.40 percent and over $200 million in total assets.
The diversity amongst this group of ETFs makes for the ability to select a broad index or specific niche in this alternative income segment in order to hone in on the best strategy to fit your needs.
Disclosure: At the time of this writing, the author had a position in PFF.
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