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Preferred Stock ETFs Beating S&P 500 with 6% Yields


For risk-averse investors, preferred stock ETFs are just what the doctor ordered in 2012. They have outperformed the S&P 500 with less volatility and above-average yields.

In other words, preferred stock ETFs have delivered great risk-adjusted performance this year.

The $10.6 billion iShares S&P U.S. Preferred Stock (PFF) is the largest ETF in the category by far and sports a yield of about 6%. PFF is one of the top-selling ETFs in 2012 with net inflows of $2.8 billion, according to IndexUniverse.

The fund has posted a total return of 17.2% year to date compared with a gain of 14.3% for SPDR S&P 500 (SPY) , according to Morningstar. However, the preferred stock ETF does concentrate most of its portfolio in Europe.

“PFF is not without its headwinds; in fact, there are many significant risk factors investors must consider. Heavy exposure to financials, regulation changes, and rising interest rates are foremost in this list,” writes Morningstar analyst Abby Woodham in a recent report on the preferred stock fund. [Preferred Stock ETFs with High Yields]

“The lion’s share of preferred stock is issued by global financial institutions. PFF’s portfolio is over 85% financials. Investors must be comfortable with exposure to the sector, including European financials,” she adds.

Other ETFs in this category include PowerShares Preferred Portfolio (PGX), PowerShares Financial Preferred Portfolio (PGF), SPDR Wells Fargo Preferred Stock ETF (PSK), iShares S&P International Preferred Stock Index (IPFF), Market Vectors Preferred Securities ex Financials ETF (PFXF), Global X Canada Preferred ETF (CNPF) and Global X SuperIncome Preferred ETF (SPFF) .

“Some investors can’t handle any volatility or stress, even that which involves success. For such investors, preferred stocks might be worth considering,” Investor’s Business Daily reports.

“A preferred stock is in some ways more like a bond. If a company goes belly up and liquidates, the bondholders are first in line. Preferred stock holders are next, followed by common stock holders who often won’t get much more than a hearty good wish,” it adds. “The dividend yield is generally higher for a preferred stock than for a common stock. The drawback is that price appreciation is less likely.”

iShares S&P U.S. Preferred Stock

Full disclosure: Tom Lydon’s clients own PGF and SPY.

The opinions and forecasts expressed herein are solely those of John Spence, 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.