Preferred stock ETFs have been popular with investors seeking above-average yields and a steady ride. Most of the category’s assets reside in passive index-linked funds but an actively managed ETF has posted solid performance.
The First Trust Preferred Securities and Income ETF (FPE) , managed by Stonebridge Advisors, is comprised of preferred and hybrid securities based on relative yield, credit quality, capital structure, credit ratings, credit fundamentals, security characteristics, liquidity, market conditions and interest rate environment.
FPE was launched in February. The active fund has a 0.85% expense ratio and a 4.59% 30-day SEC yield. Over the past three months, the fund has gained 3.7%.
Preferred securities provide diversification and low correlations to other asset classes, which helps diminish overall portfolio volatility. Preferred securities are also senior to common stocks in the capital structure.
The low interest rate environment has pushed investors to look at alternative asset classes for yield, such as preferred stock ETFs. Yet as Federal Reserve chief Ben Bernanke recently warned, investors should be mindful of the risks when stretching for yield.
“The continued barrage of asset flows has created a very steady lift for these securities that has masked the potential pitfalls of a swift correction,” writes David Fabian, chief operations officer and managing partner of Fabian Capital Management, on Seeking Alpha. “That correction could come in the form of a stock sell off, interest rate rise, or other unforeseen event.”
Fabian points to the relatively steady rise in the iShares S&P U.S. Preferred Stock Index Fund (PFF) , which has gained 13.2% over the past year. PFF has a 5.73% 12-month yield. [Are 6% Yields in Preferred Stock ETFs Worth the Risks?]
However, Fabian cautions that while the preferred ETF’s past year performance may look more like a diversified bond fund, there are bouts of extreme volatility. For instance, in July 2011, PFF plunged 10% in a short period.
First Trust Preferred Securities and Income ETF
For more information on preferred stock ETFs, visit our preferred stock category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.