Perusing the Preferred Stock ETFs

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Perusing the Preferred Stock ETFs

Perusing the Preferred Stock ETFs

At the beginning of this year, Wall Street strategists were nearly unanimous in calling for higher interest rates.

But here at Dividends & Income Daily, we told readers to disregard the rising rate worries. We were confident that the prevailing consensus was wrong on U.S. Treasuries.

This contrarian mindset led us to recommend several high-yielding preferred stocks and closed-end funds.

So let’s look back and see how we fared . . .

Since January 9, the 10-year Treasury yield has declined from 2.96% to 2.53%.

Not only were we right about interest rates, but also the timing of our specific picks, as you can see from the table above. These high-yielding securities have performed admirably as interest rates have declined.

But will these trends continue?

Well, former Federal Reserve Chief, Ben Bernanke, has said, “The only way to get interest rates up is to get the economy growing again.”

And five years into the recovery, we’re still waiting . . .

Wage growth is currently a fraction of where it should be, and economists expect a Q1 2014 GDP growth rate of -0.4% when all is said and done.

The truth is, we have the weakest recovery since World War II. Because of this, interest rates could stay at these levels for a prolonged period of time, or actually even go lower from here.

So, investors should continue to seek high-yielding securities that tend to perform well in low-interest rate environments.

Preferred stocks fit the bill, and there happens to be a multitude of preferred stock ETFs from which to choose, as you can see below:

• iShares U.S. Preferred Stock ETF (PFF) holds 316 preferred stocks with assets of nearly $9 billion. PFF’s portfolio is 95% financial preferreds, with 2% exposure to utilities, and 3% to industrials.

• PowerShares Preferred ETF (PGX) holds 192 preferred stocks with 91% exposure to financials. Utilities and industrials have 5% and 4% allocations, respectively.

• PowerShares Financial Preferred ETF (PGF) has a modest 73 preferred stocks in its portfolio, and is 100% exposed to financials. To its detriment, PGF has a high expense ratio of 0.64%, which makes it the least favorable ETF listed.

• SPDR Wells Fargo Preferred Stock ETF (PSK) consists of 138 stocks and is 86% exposed to financials. With a 0.45% expense ratio, PSK has the lowest annual fee of the ETFs listed with financial sector exposure.

• Market Vectors Preferred ex Financials ETF (PFXF) is designed for investors who wish to avoid exposure to financials. PFXF has 70 preferred stocks in its basket, of which 75% are utility stocks and the remaining are industrials. PFXF has the lowest expense ratio of all the ETFs – listed at 0.40%.

The PFXF is my favorite choice because it’s the most balanced from a sector perspective and has a low expense ratio. Simple, passive strategies shouldn’t cost us significant management fees.

This fund also happens to be a perfect complement to the financial preferreds we recommended in January.

Based on the weak macroeconomic environment and low probability of an interest rate spike, I believe that preferred stocks continue to be an attractive addition to our portfolios.

Preferred stock ETFs, such as PFXF, give us an easy, cost-effective way to add exposure to these high-yielding securities.

Safe (and high-yield) investing,

Richard Robinson, Ph.D.

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