Which Preferred Stock ETF Is Raking In More Money?

by on May 9, 2013 | ETFs Mentioned:

Preferred stock ETFs have become a big hit with some investors. These ETFs offer “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. Of this specialized universe of funds, two stand out as consumer favorites with easily some of the highest average trading volumes in this sector: iShares S&P US Preferred Stock Index Fund (PFF, A+) and PowerShares Preferred Portfolio (PGX, A) [see also How To Pick The Right ETF Every Time].

Meet the Competitors

Managed FuturesThese ETFs are the most popular options available for investors looking for ETF access to the preferred stock market, holding roughly $2.6 billion (PGX) and $12.4 billion (PFF) in total assets under management. PFF is managed by iShares and besides being the largest preferred shares fund on the market, it is dominated by holdings in financial companies. PGX offers a slightly more diversified exposure to the preferred stock market than PowerShares‘ other similar offering, but this fund also features a prominent tilt towards the financial sector. PFF’s size has long made it the most popular choice for fair-weather investors looking to capitalize on a peak in the preferred market. PGX, however, has seen a more consistent flow of returns, excluding 2011 when many corners of the market saw major outflows [see Visual Guide To Investing In Preferred Stock ETFs]. 

Though they greatly differ when it comes to inflows, PFF and PGX seem fairly matched in returns, with PFF generally offering a more exaggerated version of PGX. This difference is key for investors looking for consistency or volatility in their preferred stock ETF [try our Free ETF Head-To-Head Comparison Tool].

The Bottom Line

Preferred equities are similar to debt in that they are generally entitled to a fixed dividend payment, which reduces the volatility of the cash flows they generate; however, they may also maintain upside potentials that are typically associated with equities, along with the risk of being left empty-handed in the event of a bankruptcy. Despite preferred stocks’ 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 and liquidity, and the underlying stock fundamentals that investors should be aware of before investing.

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Disclosure: No positions at time of writing.