iShares, the issuer behind the most popular product in the Preferred Stock ETFdb Category, debuted an international counterpart to PFF this week. The recently-launched S&P International Preferred Stock ETF (IPFF) will be linked to an index consisting of preferred stock from ex-U.S. developed market issuers, with a hefty allocation to Canadian banks. IPFF becomes the sixth U.S.-listed ETF to tap into this asset class, and just the second to offer access to preferred securities offered in developed markets outside the U.S.
Preferred Stock 101
Preferred stock is classified as equity, but these securities exhibit characteristics of both stocks and bonds. Preferred stock generally carries no voting rights and offers a fixed dividend payout that is subordinate to debt payments but senior to dividends on common stock. Some preferred stock is convertible to common equity at a predetermined ratio, a feature that allows investors to maintain some potential for upside appreciation [see Guide To Preferred Stock ETFs].
In recent years, investors have gravitated towards preferred stock ETFs as a source of current yield. With interest rates hovering near record lows, the yields on traditional fixed income securities have dropped considerably. Distributions on preferred stock, however, remain relatively healthy–in part because this asset class comes with some risk. Preferred stock tends to be a popular source of financing for banks and other financial firms, meaning that funds such as IPFF generally maintain healthy allocations to a sector that can exhibit significant volatility. Other types of companies issue preferred stock as well, but financial firms tend to dominate this asset class.
“Income-seeking investors are starved for yield opportunities, but traditional income sources today are offering historically low yields,” said Darek Wojnar, Head of iShares Product Development at BlackRock. “Our international preferred stock ETF is designed to uniquely address this need, giving investors ready access to a diversified basket of preferred securities in tandem with the benefits of non-U.S. country and currency exposures.”
The iShares S&P Preferred Stock ETF (PFF), which includes securities from U.S. issuers, currently has a 30-day SEC yield in the neighborhood of 6.6%.
Under The Hood
The index underlying IPFF includes close to 70 individual securities with market caps ranging from just under $100 million to more than $14 billion. Though IPFF maintains a broad-based developed market focus, this ETF is tilted heavily towards Canadian companies; about three quarters of the portfolio consists of Canadian preferred stock issuances. Beyond Canada, other countries included are New Zealand, Singapore, Sweden, and The United Kingdom. The component securities are denominated in their local currency, meaning that IPFF provides some degree of dollar diversification (primarily in the form of CAD exposure).
The top ten index components are led by Swedbank AB (about 4.8% of total assets) and Quayside Holdings (4.1%). Several Canadian banks, including Canadian Imperial Bank, Toronto Dominion Bank, Royal Bank of Canada, and Bank of Montreal also receive weightings in the top ten. Canadian banks held up relatively well throughout the recent financial crisis, and many continue to maintain healthy balance sheets. As such, these stocks may be seen as lower risk alternatives to the U.S. financial sector that recently witnessed another high profile bankruptcy and continues to face significant risk.
Not surprisingly, the IPFF portfolio is tilted towards financial companies, which make up about 85% of total assets. The remainder of the holdings are split between energy, utility, consumer discretionary, telecom, and industrials companies. About a third of the index maintains a rating of A or A-, with securities rated BBB- through BBB+ accounting for about 27% of assets. Another third of IPFF’s holdings are note rated; preferred stocks with ratings of BB+ or BB make up about 6% of holdings.
Preferred stock is generally rated two notches below senior, unsecured debt.
Preferred Stock ETFs
IPFF is only the second U.S.-listed ETF to focus on the international preferred stock market. Earlier this year, Global X launched its Canada Preferred Stock ETF (CNPF), a single-country product that holds securities from Canadian banks and other companies.
Besides these international products, there are a handful of preferred stock ETFs focusing on U.S. securities. Aggregate AUM in preferred stock ETFs is more than $10 billion:
- iShares S&P U.S. Preferred Stock Index Fund (PFF)
- PowerShares Financial Preferred Portfolio (PGF)
- PowerShares Preferred Portfolio (PGX)
- SPDR Wells Fargo Preferred Stock ETF (PSK)
Disclosure: No positions at time of writing.