Amid a more sanguine outlook for U.S. interest rates and investors’ recent preference for defensive asset classes, some high-yield assets are soaring and receiving renewed attention from investors. That includes preferred stocks and preferred ETFs.
The iShares Preferred and Income Securities ETF (NASDAQ:PFF), the largest preferred ETF by assets, is higher by nearly 9% year-to-date and boasts a 30-day SEC yield of 5.28%, well above what investors will find on the S&P 500 or aggregate bond funds.
Preferred stocks have bond and equity traits. Like common stocks, preferred prices fluctuate throughout the day. However, preferreds generate most of their returns from dividends and preferred shareholders are higher on the totem pole than common equity shareholders in the event the issuing company defaults or goes bankrupt.
Likewise, preferred stocks are assigned par values, as is the case with bonds, have maturity dates and can be vulnerable to rising interest rates, traits often associated with bonds.
Here are some of this year’s best-performing preferred ETFs for income-hungry investors to consider.
VanEck Vectors Preferred Securities ex Financials ETF (PFXF)
Expense ratio: 0.41% per year, or $41 on a $10,000 investment.
Soon to be seven years old, the VanEck Vectors Preferred Securities ex Financials ETF (NYSEARCA:PFXF) was the first preferred ETF to set itself apart from legacy funds in this category. PFXF does that by excluding preferred stocks issued by financial services companies, which is no small tax considering the spate of preferreds issued by that sector following the global financial crisis.
This preferred ETF tracks the Wells Fargo Hybrid and Preferred Securities ex Financials Index and holds 113 preferred stocks. With financials excluded from this preferred ETF, PFXF allocates nearly 71% of its combined weight to preferred stocks issued by by electric utilities, real estate and telecommunications companies.
Excluding financial preferred stocks does not diminish PFXF’s yield as highlighted by the preferred ETF’s 30-day SEC yield of 5.77%. Additionally, PFXF’s methodology has led to superior performance. Over the past three years, this preferred ETF has beaten the aforementioned PFF by 430 basis points.
Virtus InfraCap U.S. Preferred Stock ETF (PFFA)
Source: Simon Cunningham via Flickr
Expense ratio: 0.80%
The Virtus InfraCap U.S. Preferred Stock ETF (NYSEARCA:PFFA) is up 15% year-to-date, making it one of the stars among preferred ETFs this year. That is a testament to active management being a valid style with preferred stocks.
PFFA’s management team “evaluate potential investments on a variety of key variables, including the competitive position of a company; the perceived ability of the company to earn a high return on capital; the historical and projected stability and reliability of the profits of the company; the anticipated ability of the company to generate cash in excess of its growth needs; and the access of the company to additional capital,” according to the issuer.
PFFA recently celebrated its first anniversary and over the preferred ETF’s first year on the market, its performance has been admirable. This actively managed preferred ETF is higher by 1.60% over the past 12 months while the largest preferred is in the red over that span.
Global X U.S. Preferred ETF (PFFD)
Expense ratio: 0.23%
The Global X U.S. Preferred ETF (CBOE:PFFD) is a basic, but cost-effective approach to preferred stocks. This preferred ETF charges just 0.23% per year, or $23 on a $10,000 stake, making it one of the least expensive funds in this category. The average preferred ETF charges 0.43% per year.
Home to nearly $260 million in assets under management, PFFD is almost two years old and follows the ICE BofAML Diversified Core U.S. Preferred Securities Index. PFFD holds 237 preferred stocks and is similar to other funds in this category in that it is heavily allocated to preferreds issued by financial services companies. Those issues represent over 70% of PFFD’s weight.
This preferred ETF’s year-to-date performance has been steady though not staggering, but it does yield 5.70% and is a solid bet for cost-conscious, income-seeking investors.
InfraCap REIT Preferred ETF (PFFR)
Expense ratio: 0.45%
The InfraCap REIT Preferred ETF (NYSEARCA:PFFR) is unique among preferred ETFs in that this fund focuses on preferred stocks issued by real estate investment trusts (REITs), a sector that is a major issuer of preferred stock. Broadly speaking, REITs are delivering for investors this year, a theme that is trickling down to PFFR, which is up almost 12%.
Exclusive of each other, preferreds and REITs are high-yield assets. Combined, the yield scenario becomes alluring as highlighted by PFFR’s yield of 5.89%. There are other benefits to considering preferred stocks issued by REITs.
“These securities are also typically exposed to less leverage with generally more predictable revenue streams than those issued by banks and insurance companies,” according to PFFR’s issuer.
This preferred ETF is heavily allocated to mortgage REITs and various types of property REITs, including hotels, residential and storage facilities.
Innovator S&P Investment Grade Preferred ETF (EPRF)
Expense ratio: 0.47%
Like some of the other preferred ETFs highlighted here, the Innovator S&P Investment Grade Preferred ETF (CBOE:EPRF) has a dedicated niche. In the case of EPRF, this preferred ETF focuses on preffereds issued by investment-grade companies.
The fund’s underlying index, the S&P U.S. High Quality Preferred Stock Index, “selects floating, variable and fixed-rate investment grade preferred issues (BBB- or higher) from U.S. listed preferred stocks on a quarterly basis,” according to the issuer.
EPRF holds 110 preferred stocks and like other preferred ETFs, the fund has a hefty 71.25% weight to preferreds issued by financial services companies. Preferreds issued by utilities and real estate companies combine for over 26% of EPRF’s roster.
Over 92% of EPRF’s holdings are rated BBB on the S&P ratings scale and the fund has a yield of 5.15%.
Todd Shriber does not own any of the aforementioned securities.