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Preferred Stock ETFs for Income-Thirsty Investors

Zacks Equity Research

In the current low-yield environment, yield-hungry investors seek higher income from non-traditional asset classes or instruments. One such asset class that could fulfill investors’ drive for income is the preferred stock.
 
Though yields on the benchmark 10-year U.S. Treasury note recently popped on a host of upbeat U.S. economic reading, yields are still at subdued levels. As of March 8, 2016, yield on the U.S. Treasury note was 1.83%. Also, though the major indices recovered lately, these are not out of the woods (read: Top ETF Stories of February).
 
Investors should note that even if rates rise in the future, many may still be looking for benchmark-beating yields. For them, preferred equities and the related ETFs could be a great tool.
 
Preferred Stock ETFs in Focus
 
Not only do the preferred stocks offer considerably higher yields (often exceeding 5%), they also provide an opportunity for capital appreciation. They are hybrid securities having the characteristics of both debt and equity. The preferred stocks pay stockholders a fixed, agreed-upon dividend at regular intervals, like bonds.
 
Preferred stocks are thus quite stable and generally have a low correlation with other income generating segments of the market like REITs, MLPs, corporate bonds and TIPs.
 
Though investors can buy individual companies’ preferred stocks, buying preferred stock ETFs can be a very convenient way of investing in a basket of diversified companies at a low cost. Below we have highlighted four ETFs, which not only offer substantial yields but also provide a great opportunity for capital appreciation.
 
PowerShares Financial Preferred ETF (PGF
 
Investors worrying over the recent crash in the banking sector and energy woes, yet seeking a touch of financial securities in the portfolio, may consider PGF. This is because this fund is off 1.9% so far this year (as of March 8, 2016) while Financial Select Sector SPDR ETF (XLF) has shed 8.1%.
 
Since the rate of decline is muted in PGF and the fund offers about 5.71% in annual yield, lovers of finance securities may well consider it. Investors should note that much of the fund’s underlying securities are not of high investment grade. HSBC (8%), Barclays (8.1%) and Wells Fargo (8%) are its top three holdings.
 
Market Vectors Preferred Securities ex Financials ETF (PFXF)

There is an option for investors who want to stay out of the financial sector – which most preferred stock ETFs are heavy on. This group of investors can have a play on PFXF which puts 33.4% of its assets on REITs, 22.3% on electric stocks and 17.6% on telecom securities (read: 5 ETFs to Watch in March).

As much as 45.25% of the portfolio is investment grade in nature. However, 39.54% of the basket is not rated while 15.19% of securities are non-investment grade. Tyson Foods (4.31%), Frontier
Communications (3.89%) and Kinder Morgan (2.79%) are its top three securities. The 30-Day SEC Yield (as of March 8, 2016) is 6.13%. The fund has added 2.4% so far this year (as of March 8, 2016).

SuperIncome Preferred ETF (SPFF)

As the name suggests, the fund calls for outstanding dividend yields. Frontier Communications (5.75%), Wells Fargo Co (5.30%) and GMAC Cap (Ally) Pfd 8.125% (4%) take the top three spots in the basket. The 30-day SEC yield of the fund is 7.05%. The fund charges 58 bps in fees and is off just 1.44% in the year-to-date frame (as of March 8, 2016) (see all preferred stock ETFs here).

SPDR Wells Fargo Preferred Stock ETF (PSK)

The 142-securities portfolio invests 77.7% of the basket in the financial sector. Telecom, utilities, industrials and consumer discretionary have single-digit exposure in the fund. As much as 86% of the portfolio is rated Baa (76.3%) or above. The 30-Day SEC yield is 5.39%. The fund charges 45 bps in fees and is up 0.2% so far this year (as of March 8, 2016).

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PWRSH-FIN PFD (PGF): ETF Research Reports
 
SPDR-FINL SELS (XLF): ETF Research Reports
 
MKT VEC-PR EX-F (PFXF): ETF Research Reports
 
GLBL-X SUPERINC (SPFF): ETF Research Reports
 
SPDR-WF PFD STK (PSK): ETF Research Reports
 
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Zacks Investment Research
 
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