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Federal Reserve Powers Preferred ETFs

ETF Professor

Rate-sensitive asset classes got some love earlier this week when the Federal Reserve didn't raise interest rates. The better news is that the Fed appears likely to raise rates just twice this year, down from previous estimates four rate hikes.

Among the income-generating asset classes that have benefited from declining Treasury yields are preferred stocks. Preferred stocks are often viewed as hybrid securities, displaying both bond- and equity-like traits, and reside higher on the totem pole than do common stocks in terms of investor claims in the event of issuer default.

Several exchange traded funds with over $20 billion in combined assets under management offer exposure to preferred stocks, including the SPDR Wells Fargo Preferred Stock ETF (NYSE: PSK). PSK, which turns seven later this year, follows the Wells Fargo Hybrid and Preferred Securities Aggregate Index.

Related Link: A Muddled Outlook For Industrial ETFs

Due to the fact that preferreds usually sport high yields and longer durations, the asset class is viewed as negatively correlated to hawkish Fed moves. With the Fed not appearing all that hawkish, at least not at the moment, income investors may want to revisit an ETF like PSK.

“Preferred securities may be a source of further income generation given their potential higher yields than traditional investment grade bonds, at a similar duration,” said State Street Vice President David Mazza in a recent note.

Like many of the competing preferred ETFs on the market, the bulk of PSK's holdings are issued by financial services companies. PSK holds 144 preferred stocks, nearly 78 percent hail from the financial services sector. Telecom and utilities preferred combine for over 9 percent of PSK's weight.

Most of the issuers behind PSK's holdings carry investment-grade ratings so reaching for the ETF's tempting 6.15 percent yield does not mean taking on credit risk.

This year, PSK is proving to be a case study in investors' renewed affinity for rate-sensitive, income-generating assets. The ETF has added $121.6 million of its $473.4 million in assets under management since the start of 2016.

Image credit: Kurtis Garbutt, Flickr

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