These are good times for high-yielding, rate-sensitive asset classes. The dollar is faltering. So are yields on U.S. government debt, and there does not appear to be much the Federal Reserve can do about either scenario.
Heading into this year, many market observers believed the Fed would raise interest rates four times. Nearly five full months into 2016, there has not been a single rate hike, leaving many bond market observers to believe that two, at the most, are in store this year.
These are good things for yield-starved investors, particularly those who previously embraced rate-sensitive asset classes such as preferred stocks and the relevant exchange-traded funds.
Preferred stocks are often viewed as hybrid securities, meaning market participants view preferred stocks as part equity, part bond. Preferred stocks are often prized by astute income investors because preferred stock dividends are fixed — it is a significantly negative financial event when a company skips out on paying preferred dividends — and they feature tempting yields.
Preferred stocks and ETFs languished a bit in 2015 as market participants priced in multiple rate hikes for 2016. That is to say the Fed is doing preferreds a good turn this year by consistently delaying another rate increase.
There are fewer than 20 preferred ETFs on the market today and the world of preferred stock ETFs is dominated by the likes of the iShares U.S. Preferred Stock ETF (PFF) and the PowerShares Preferred Portfolio (PGX). However, there are some hidden gems among preferred stock ETFs, including the following funds.
Preferred ETFs to Buy: Global X SuperIncome Preferred ETF (SPFF)
Expenses: 0.58%, or $58 per $10,000 invested
A case can be made that among preferred stock ETFs, the Global X SuperIncome Preferred ETF (SPFF) is not getting the respect it deserves.
With $209 million in assets under management, SPFF is not small. Plus, this preferred stock fund has some nifty features, such as the ability to hold preferred stocks issued by Canadian firms, which can help bolster yield.
Speaking of yield, this preferred stock ETF packs a punch with a 30-day SEC yield of 6.8%. That is well above the average for preferred stocks and vastly superior to the yield investors will find on Treasuries and investment-grade corporate debt.
SPFF, like other preferred stock ETFs, offers diversification advantages.
“The correlation of preferreds was 0.43 with High Yield Bonds, 0.39 with Common Stocks, 0.16 with 10 Year Treasuries, and 0.04 with corporate bonds (over the last 10 years ending December 2015,” according to Global X.
SPFF charges 0.58% per year, or $58 for every $10,000 invested.
Preferred ETFs to Buy: First Trust Preferred Securities and Income ETF (FPE)
First Trust Preferred Securities and Income ETF (FPE) breaks from the pack of other preferred stock ETFs in that it is actively managed. Due to their often negative sensitivity to interest rate hikes, preferred stocks are an asset class where active management can work in investors’ favor.
Passively managed preferred stock ETFs track an index, meaning there is little flexibility in the fund’s holdings, even when rates rise. On the other hand, FPE’s managers can adjust the ETF’s portfolio to hold shorter-dated preferreds to avoid the ravages of higher rates.
In fact, nearly 62% of FPE’s lineup are fixed-to-floating rate preferred stocks and another 6.5% are floating securities, underscoring FPE’s ability to endure changing interest-rate environments.
About 48% of FPE’s 160 holdings are rated between BB- and BBB-. The ETF also features ample international exposure, as ex-U.S. developed markets account for nearly 38% of FPE’s geographic lineup.
This preferred stock ETF charges 0.86% a year.
Preferred ETFs to Buy: iShares International Preferred Stock ETF (IPFF)
Speaking of international exposure to preferred stocks, we have the iShares International Preferred Stock ETF (IPFF).
In the case of this preferred stock ETF, “international” does not mean taking on significant risk, as IPFF devotes 90% of its weight to Canadian and U.K. preferreds. Rest assured, interest rates are low in those countries, too.
IPFF, which tracks the S&P International Preferred Stock Index, is not a high yielder relative to the other preferred stock ETFs highlighted here, as the iShares offering has a 30-day SEC yield of 3.3%. Plus, this preferred stock ETF is more than three times as volatile as PFF, its U.S. counterpart.
IPFF is down 25% over the past year. This preferred stock ETF charges 0.55% a year.
At the time of this writing, Todd Shriber did not own any of the aforementioned securities.