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3 Preferred Stock ETFs Yielding More than 4%

Preferred stocks have always been in the spotlight for income investors because of the high yields they provide. These hybrid stocks have the characteristics of both equities and debt as they provide a fixed income like debt and have less risk than equities.


Despite rising rate concerns, these hybrid investments are considered to be a good bet owing to the current risks in the markets. The yields on the benchmark 10-year U.S. Treasury note closed lower at 2.384% on March 27, 2017 as investors grew pessimistic about tax reform implementation by President Trump following the withdrawal of the healthcare bill. Moreover, U.S stocks witnessed their largest redemption since the Brexit vote in June, to the tune of $8.9 billion, in the week ended March 22, 2017 (read: ETFs Deserving a Close Watch If Health Care Plans Fail).


Preferred stock ETFs offer high yields and a safer bet to gain exposure to this segment of the markets, as a more diversified investment at a comparatively lower cost can be attained. Even though preferred stocks generally have a call provision, in the current scenario, it’s less likely to be used by issuers (read: Trump Trade Fades: Top and Flop ETFs of Last Week).


We therefore discuss probable investments in this segment of the market considering the current scenario:


PowerShares Variable Rate Preferred Portfolio ETF VRP


This fund offers an interesting feature to investors in a rising rate environment. VRP is a floating rate bond that holds floating-rate preferred stocks and/or hybrid securities that have similar characteristics.


The fund has AUM of $1.22 billion and charges a fee of 50 basis points a year. It is heavy on Financials with a 78% exposure to the sector. Though Financials suffered a setback recently owing to the Trump uncertainty, the sector provides good exposure in a rising rate scenario. Energy and Utilities are the other two sectors with major holdings of 9.97% and 6.97% respectively. The fund has around 28.3% allocated to its top 10 holdings. It returned 6.06% in the past one year and 3.13% in the year-to-date time frame (as of March 27, 2017). It has a dividend yield of 4.96%.


iShares International Preferred Stock ETF IPFF


This fund offers preferred stock exposure to companies in developed markets outside the U.S. What is interesting about this fund is that it is the best performing ETF in the space so far this year.


The fund has AUM of $61.7 million and charges a fee of 55 basis points a year. It is heavy on Financials with a 40% exposure to the sector. Energy and Insurance occupy a share of 24.6% and 13.0%, respectively. Though the 11% exposure to UK invites uncertainty, it has high exposure to Canada with around 78.5% allocated to the country. The current optimism in Canada post the federal budget seems is encouraging. The fund has around 21.7% allocated to its top 10 holdings. It returned 5.72% in the past one year and 8.01% in the year-to-date time frame (as of March 27, 2017).  It has a dividend yield of 4.66% (read: ETFs in Focus Post the Canadian Federal Budget).


Global X SuperIncome Preferred ETF SPFF


This fund is a relatively straightforward preferred stock ETF investing in high yielding preferred shares.


The fund has AUM of $228.3 million and charges a fee of 58 basis points a year. It is heavy on Financials with a 66.5% exposure to the sector. Energy and REITs are the other two sectors with major holdings, having 7.95% and 6.8% share, respectively. The fund has around 40% allocated to its top 10 holdings. It lost 1.75% in the past one year but gained 1.02% in the year-to-date time frame (as of March 27, 2017).  Though this fund has not been much convincing in terms of capital appreciation, what is interesting about this fund is its high dividend yield. It has a dividend yield of 6.82%.


Why Preferred Stock Funds?


Growing uncertainty in the markets make us look out for preferred stock investments. They have low correlation with equities and hence provide diversification benefits. These high yielding investments provide high current income and are marked by relatively lower volatility than equities.


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PWRSH-VR PFD (VRP): ETF Research Reports
 
GLBL-X SUPERINC (SPFF): ETF Research Reports
 
ISHARS-IPSIF (IPFF): ETF Research Reports
 
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