The Federal Reserve has boosted interest rates twice this years, and bond traders widely believe the central bank will hike rates one more time before the end of the year, but that’s not derailing high-yield asset classes such as preferred stocks, and the preferred ETFs that offer them in bundles.
For example, the iShares U.S. Preferred Stock ETF (NYSEARCA:PFF) — the largest ETF dedicated to preferred stocks — is up nearly 8% year-to-date. Income investors are diving right in, with the PFF sporting inflows of almost $780 million so far in 2017.
Preferred stocks, for those not in the know, are a security that acts like a part-equity, part-fixed-income “hybrid.” Dividends paid by preferred stocks are fixed, but typically high — in the 5%-7% range.
When a company misses a preferred dividend payment, that’s a sign of declining credit quality, potentially inviting ratings downgrades. See, preferred stock owners are higher up on the ladder than common shareholders when it comes to claims on a company’s assets in the event of bankruptcy or default. Thus, companies tend to protect preferred payouts until the bitter end.
If you want to invest in preferred ETFs (or even just individual preferred stocks), interest-rate risk is part of the game. But with the rate environment in the U.S. still relatively sanguine, income investors should strongly consider the space.
Here are three of the best preferred ETFs if you want to enter this high-yield space.
Preferred ETFs: PowerShares Preferred Portfolio (PGX)
Dividend Yield: 5.6%
Expenses: 0.5%, or $50 annually on every $10,000 invested
The PowerShares Preferred Portfolio (NYSEARCA:PGX) is one of the largest preferred ETFs with almost $5.1 billion in assets under management.
PGX is one of several preferred ETFs issued by PowerShares, and represents an alternative to the PowerShares Financial Preferred Portfolio (NYSEARCA:PFG), which focuses solely on preferred stocks issued by financial services firms.
That serves as a reminder to investors that many preferred stocks hail from the financial services sectors. Over 74% of PGX’s 255 holdings are courtesy of financial companies.
One important factor that sets PGX apart from many other preferred stock funds is that it holds preferreds from international companies as well, such as HSBC Holdings plc (ADR) (NYSE:HSBC) and Barclays PLC (ADR) (NYSE:BCS).
Preferred ETFs: Elkhorn S&P High Quality Preferred ETF (EPRF)
Dividend Yield: 5.3%
The Elkhorn S&P High Quality Preferred ETF (BATS:EPRF) is unheralded among preferred ETFs, perhaps because it is just 13 months old. However, this preferred fund offers a few interesting angles.
EPRF tracks the S&P U.S. High Quality Preferred Stock Index, which only includes preferred stocks that carry investment-grade credit ratings. That strategy can reduce some of the volatility that come with high-yield asset classes.
For the emphasis on quality, investors do not have to make a significant yield sacrifice, as EPRF sports a 30-day SEC yield of almost 5.3%.
The ETF holds 103 preferred stocks, a combined 48% are issued by insurance companies or diversified financial services firms — fairly low compared to its peers. Other top holdings included preferreds from Pitney Bowes Inc. (NYSE:PBI) and Boston Properties, Inc. (NYSE:BXP).
Preferred ETFs: Global X SuperIncome Preferred ETF (SPFF)
Dividend Yield: 6.7%
If you’re going after pure high yield, the Global X SuperIncome Preferred ETF (NYSEARCA:SPFF) is the fund for you.
The SPFF puts all the emphasis on yield by typically investing in the 50 top-yielding preferred stocks in North America (though it holds just 46 right now). That emphasis leads to a 30-day SEC yield of nearly 7%.
Like its peers, SPFF is heavy on financial services preferreds, with that sector accounting for almost two-thirds of the ETF’s weight. At the moment, top holdings include Barclays, Kinder Morgna Inc (NYSE:KMI) and Ally Financial Inc (NYSE:ALLY).
SPFF does, however, remind investors about the vulnerability of high-yield assets in rising rate environments. Although modest, this preferred ETF is sporting a year-to-date loss — something that cannot be said of the other funds mentioned here. That’s in part an effect of the lower credit quality of the fund’s portfolio.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.