Van Eck is wading into a new corner of the ETF industry this week, debuting a unique product offering that will deliver exposure to preferred stock issued by non-financial companies. The new Market Vectors Preferred Securities ex-Financials ETF (PFXF) will offer exposure to an index comprised of about 70 different issues of preferred stock with credit ratings ranging from CCC to AA. While PFXF certainly isn’t the first ETF to offer access to these “hybrid” securities that have characteristics of both stocks and bonds, it will be unique in that it avoids financial issuers entirely. The iShares S&P U.S. Preferred Stock Fund (PFF), which has more than $9 billion in AUM, allocates more than three quarters of its portfolio to financial companies.
Under The Hood
Instead, PFXF will spread holdings around a number of different sectors. The new fund will include a meaningful allocation to REITs (about 31%) as well as another 6% or so in insurance companies. Other large allocations are made to issuers in the electric (26%), auto manufacturing (12%) and telecom (8%) industries. Among the largest individual issuers will be General Motors (10%), Apache Corp. (4%), and PPL Corp. (4%).
PFXF will charge an expense ratio of 0.40%, which makes it the cheapest preferred stock ETF on the market. PFF currently charges about 0.48%, while other similar ETF go as high as 0.60%.
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Case For Preferred Stock
Preferred stock falls between common stock and traditional senior debt securities in terms of liquidation preference, and can offer the potential to capture current returns that are more substantial than either. Preferred stock has attributes of both common stock and debt, sometimes offering an ownership stake (generally without voting rights) as well as distributions at a predetermined rate that can potentially be treated as qualified dividend income.
With interest rates continuing to remain near record lows, many investors have turned to preferred stock as a tool for boosting current returns. The index underlying PFXF has an average current yield of about 6.8%, and many other preferred stock ETFs have distribution yields well in excess of 5%.
The preferred stock market tends to be dominated by financial issuers; close to 80% of the market is represented by this often volatile sector. By focusing on the non-financial component of the preferred stock universe, PFXF may reduce overall volatility significantly [ETFdb Pro members can see the Financials Free ETFdb Portfolio; sign up for a free 7-day trial to see 40+ model portfolios].
Preferred Stock ETFs
Preferred stock ETFs have close to $15 billion in aggregate assets, led by almost $10 billion in PFF. Among the noteworthy options in this asset class are:
- PowerShares Financial Preferred Portfolio (PGF): This ETF takes a different approach than the new Van Eck ETF, focusing exclusively on the financial sector. PGF has been by far the best performer in 2012 among preferred stock ETFs, gaining close to 13% already.
- S&P International Preferred Stock Index (IPFF): Whereas most preferred stock ETFs–including PGF, PFF, and PFXF–tend to focus on securities issued by U.S. companies, IPFF holds a portfolio from international issuers.
- Global X Canada Preferred ETF (CNPF): This ETF targets securities of Canadian issuers, featuring a heavy tilt towards Canadian banks.
Disclosure: No positions at time of writing.