As the ETF industry has expanded in recent years, so too has the number of asset classes accessible through exchange-traded products. Preferred stock ETFs have become a big hit with some investors, offering “hybrid” exposure that has delivered strong returns and provided valuable diversification benefits to traditional portfolios by combining the benefits of both traditional equities and bonds [see Visual History Of The S&P 500].
ETFdb Pro members can read more in our Preferred Stock ETFdb Category report, which details the eight different funds currently available to investors.
The Hybrid ETF
Preferred stocks are by no means a new financial innovation having been a preferred financing source for many financial companies for decades, but despite their popularity as a means of raising capital, preferred stock investments have been slow to catch on in the ETF world. By offering the characteristics of both stocks and bonds, preferred stock ETFs can be impacted by a number of factors, including interest rates, liquidity and the underlying stock fundamentals. With a market cap of almost $13 billion, ETFs in this category may be ideal for investors looking to reduce volatility in equity-intensive portfolios or provide opportunities for enhanced returns in portfolios that are dominated by fixed-income holdings. [see 10 Questions About ETFs You've Been Too Afraid To Ask].
The chart below highlights the dividend yield, three-year performance and number of holdings in the five largest preferred stock ETFs:
- SPDR Barclays Capital Convertible Bond ETF (CWB, A-)
- S&P US Preferred Stock Fund (PFF, A+)
- Financial Preferred Portfolio (PGF, B+)
- Preferred Portfolio (PGX, A)
- SPDR Wells Fargo Preferred Stock ETF (PSK, B+)
This comparison is only based on the returns of these ETFs; it is also important for investors to take a close look at the weighting and holding methodologies of these ETFs, as these can strongly influence future returns and dividend yields.
Disclosure: No positions at time of writing.