Preferred stocks are beloved by many income-seeking investors and exchange-traded funds (ETFs) have increased the accessibility of this high-yielding asset class. Today, there are close to a dozen preferred ETFs on the market, several of which have well over $1 billion in assets under management.
Preferred stocks are considered hybrid securities because they possess both equity and fixed income characteristics. As high-yielding assets, preferreds are sensitive to rising Treasury yields, highlighting the fixed income element to this asset class.
Preferreds also pay dividends that are usually higher than the dividends on common stocks and, in some cases, preferred dividends exceed interest payments on the issuer’s corporate bonds.
Another element to preferred stocks that investors should be aware of is that in the event of issuer bankruptcy, preferred investors are higher up on the totem pole for claims on assets than common shareholders.
With $18.5 billion in assets under management, the iShares U.S. Preferred Stock ETF (NASDAQ:PFF) is the dominant preferred stock ETF in the U.S. PFF is more than triple the size of its next-largest competitor. While PFF certainly holds a dominant perch among preferred stock ETFs, there are plenty of other preferred ETFs for income investors to consider.
Preferred ETFs: Global X U.S. Preferred ETF (PFFD)
Expense Ratio: 0.23% per year, or $23 on a $10,000 investment
The Global X U.S. Preferred ETF (BATS:PFFD) is the newest preferred stock ETF to come to market, having debuted earlier this month. For those wondering why a rookie preferred ETF makes this list, the Global X U.S. Preferred ETF does so not because it is new, but for another reason.
With its annual fee of just 0.23%, PFFD is now the least expensive preferred ETF trading in the U.S. PFFD’s expense ratio is about half the category average, presenting income investors with significant cost savings over rival, established preferred ETFs.
PFFD tracks the BofA Merrill Lynch Diversified Core U.S. Preferred Securities Index and holds 253 preferred stocks.
Preferred ETFs: PowerShares Preferred Portfolio (PGX)
Expense Ratio: 0.5%
Home to $5.3 billion in assets under management, the PowerShares Preferred Portfolio (NYSEARCA:PGX) is the second-largest preferred stock ETF after the aforementioned PFF. PGX is also one of the oldest preferred ETFs in the U.S. as the fund will be a decade old in January.
PGX tracks the BofA Merrill Lynch Core Plus Fixed Rate Preferred Securities Index, which mandates that its components “must be rated at least B3, based on an average of three leading rating agencies: Moody’s, S&P and Fitch,” according to PowerShares.
As mentioned earlier, preferreds are beloved for their tempting yields and PGX does not skimp on that front. This preferred ETF has a 30-day SEC yield of 5.5%.
Preferred ETFs: PowerShares Variable Rate Preferred Portfolio (VRP)
Expense Ratio: 0.5%
The PowerShares Variable Rate Preferred Portfolio (NYSEARCA:VRP) solves a problem often associated with preferred stocks. That being the ability to diminish interest rate risk. In fact, when it debuted just over three years, VRP was the first (it still is) preferred ETF following a variable rate index.
VRP follows the Wells Fargo Hybrid and Preferred Securities Floating and Variable Rate Index and has an effective duration of 4.13 years. Duration measures a bond’s sensitivity to changes in interest rates. While VRP is less rate-sensitive than rival preferred ETFs, that does not mean investors are cheated on yield with this preferred ETF. VRP has a 30-day SEC yield 4.6%.
That yield comes without much exposure to highly speculative junk-rated debt as 87% of VRP’s holdings are rated BBB or BB.
Preferred ETFs: First Trust Preferred Securities and Income ETF (FPE)
Annual Fee: 0.85%
The First Trust Preferred Securities and Income ETF (NYSEARCA:FPE) is one of the priciest preferred stock ETFs because it is actively managed. Although active management has taken its lumps in other asset classes, that management can have advantages in alternative asset classes, such as preferred stocks.
Over the past three years, FPE has outperformed the passively managed PFF by about 800 basis points while being significantly less volatile than the passive preferred ETF. While FPE is more expensive than most of its rivals, it if keeps up that type of out-performance, the fee differential becomes an afterthought for investors.
FPE holds almost 220 preferred stocks and has a 30-day SEC yield of 5.1%.
Preferred ETFs: VanEck Vectors Preferred Securities ex Financials ETF (PFXF)
Expense Ratio: 0.41%
The VanEck Vectors Preferred Securities ex Financials ETF (NYSEARCA:PFXF) does something few, if any, rival preferred ETFs do: Explicitly avoid preferreds issued by financial services companies. Due to a spate of preferred issuance by banks after the global financial crisis, most preferred ETFs are loaded with preferreds from that sector.
That is not the case with PFXF, though the ETF cheats a little bit with an almost 5% allocation to preferreds issued by insurance companies. Nearly 52% of PFXF’s 112 holdings are issued by real estate or electric companies.
This preferred ETF is one to consider for income investors looking to skirt bank exposure as PFXF has a 30-day SEC yield of 5.9%.
Preferred ETFs: iShares International Preferred Stock ETF (IPFF)
Expense Ratio: 0.55%
Preferred stocks do not have to be an exclusively domestic affair. The iShares International Preferred Stock ETF (BATS:IPFF) proves as much. This preferred ETF is the international equivalent of the aforementioned PFF.
Although IPFF is an ex-US preferred stock ETF, that does not mean investors are taking on excessive risk at the geographic. Canada and the U.K. combine for 89% of IPFF’s geographic weight.
While IPFF is more volatile than domestic preferred ETFs, investors are being rewarded by the international preferred ETF as it is up 21.7% year-to-date, good for one of the best performances among all preferred ETFs.
IPFF has a 30-day SEC yield of 3.4%.
Preferred ETFs: Elkhorn S&P High-Quality Preferred ETF (EPRF)
Expense Ratio: 0.47%
The Elkhorn S&P High Quality Preferred ETF (BATS:EPRF) is an idea for conservative investors to consider among preferred ETFs.
This preferred ETF tracks the S&P U.S. High-Quality Preferred Stock Index, which only includes preferred stocks that carry investment-grade credit ratings.
As a result of its emphasis on high-quality fare, EPRF holds just 99 preferred stocks, a small lineup compared to some of its rivals highlighted here. Even with the quality focus, this preferred ETF still yields north of 5%.
Todd Shriber does not own any of the aforementioned securities.