Count preferred stocks and the related exchange traded funds among the beneficiaries of declining interest rates this year. Several preferred ETFs currently reside at or close to 52-week highs.
The VanEck Vectors Preferred Securities ex Financials ETF (NYSE: PFXF) is one of those funds. Up 13.12% year to date, PFXF closed just 1.33% below its 52-week high on Wednesday.
PFXF tracks the Wells Fargo Hybrid and Preferred Securities ex Financials Index, giving it a unique approach among funds in this category. Most are laden with preferred stocks issued by banks, a relic of the global financial crisis when banks turned to preferred stock issuance as an avenue for raising capital.
Why It's Important
The history of the $744.7 million PFXF is relevant, but so is the current, favorable environment for preferred stocks. Like other high-yield asset classes (PFXF has a 30-day SEC yield of 5.30%), preferreds are vulnerable to rising interest rates. Conversely, accomodative monetary policy usually benefits PFXF and friends.
“Historically, a company’s preferred securities have offered higher yield than its common stock or senior debt,” VanEck said in a recent note. “However, with traditional financial companies saturating the market, this traditional scenario is not playing out the way it once had. Targeting preferred securities ex-financials may provide investors with a yield premium, most effectively spent allocating to the broad preferred market in aggregate.”
Importantly, PFXF's strategy of eliminating financial services preferreds isn't a gimmick. It's a winning methodology. Over the past three years, the fund has outperformed the largest preferred ETF by 550 basis points.
In addition to the tempting yields, preferreds offer another perk: low correlations to other asset classes.
“For investors seeking yield in the current low rate environment, preferred securities can potentially offer increased income generation within a portfolio,” according to VanEck. “In addition, their low correlations with equities and traditional fixed income instruments can make them a useful diversifier in portfolios. Preferreds can serve as a complement to a portfolio’s core fixed income allocation alongside or in place of high yield debt.”
PFXF's five-year correlation to U.S. stocks is just 0.52 and to domestic junk bonds, it's just 0.59, according to issuer data.
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