High Yield Preferred Stock ETFs for 2017
The past several years haven’t been that nice to income investors. Interest rates were kept artificially low, while stocks with ultra-high yields were a bit risky. But there is one type of investment has been providing high returns with relatively low risk: preferred stocks. In this article, we are going to take a look at the best preferred stock ETFs for 2017.
When we talk about the best dividend stocks, we are usually referring to common stocks of dividend-paying companies. A preferred stock also represents a class of ownership in a company, but it is quite different from common stocks. The best way to understand preferred stocks is to think of them as hybrid instruments that include properties of both common stocks and bonds. This is because preferred stocks are senior to common stocks, but subordinate to bonds in terms of claims on a company’s assets and earnings.
As the name suggests, preferred stocks have preference in dividend payments. Companies must pay the specified dividends on preferred shares before paying dividends on common stocks. Moreover, investors of preferred stocks have prior claim on a company’s assets in the event of liquidation than common stockholders, although they remain subordinate to bondholders. Preferred shares usually do not have voting rights.
One thing that makes preferred stocks attractive in the eyes of income investors is their high dividend yields. Many preferred stocks are yielding more than five percent, which is quite impressive given that the average yield of the S&P 500 is a measly 1.94% at the moment. Adding in the fact that preferred stocks are often less volatile than common stocks, they could be great investments for conservative investors.
Of course, preferred stocks are not risk-free. One of the things that could affect the value of preferred stocks is interest rates. Because preferred stocks usually have a fixed dividend rate, their share prices will fall when interest rates are rising.
What if interest rates are falling? Well, you might think that as interest rates drop, it would make high yield preferred stocks more attractive. However, many preferred shares are callable, meaning the issuer can purchase them back at par value before the actual redemption date. So when interest rates fall, a company could simply call its preferred shares and issue another series set with a lower yield.
There is also the risk with the issuer. If a company gets downgraded by credit rating agencies, it could affect the value of its preferred shares. At the same time, a downturn in an industry—like what happened to the oil and gas industry since the summer of 2014—could impact a company’s ability to make dividend payments on its preferred shares.
Preferred stock ETFs are exchange-traded funds that specialize in preferred securities. Using preferred stock ETFs allows investors to spread their investments across multiple companies. Moreover, investors don’t need to pick and choose which company and which series of preferred shares to own. On top of that, ETFs trade just like regular stocks.
By investing in preferred stock ETFs, investors can save the commissions paid to brokers if they were to buy dozens of preferred stocks themselves. However, like all ETFs, preferred stock ETFs charge a management fee. So when choosing preferred stock ETFs, it’s important to take into account their management expense ratio, or MER.
Now, let’s take a look at the top preferred stock ETFs for 2017.
Preferred Stock ETF List
| ETF Name | Ticker Symbol | Dividend Yield | Management Expense Ratio (MER) |
| iShares U.S. Preferred Stock ETF | PFF | 5.65% | 0.47% |
| PowerShares Preferred Portfolio | PGX | 5.68% | 0.50% |
| First Trust Preferred Securities and Income ETF | FPE | 5.91% | 0.85% |
| SPDR Wells Fargo Preferred Stock ETF | PSK | 5.44% | 0.45% |
| PowerShares Financial Preferred Portfolio | PGF | 5.53% | 0.50% |
| iShares International Preferred Stock ETF | IPFF | 5.36% | 0.55% |
| VanEck Vectors Preferred Securities ex Financials ETF | PFXF | 5.74% | 0.41% |
Best Preferred Stock ETFs
1. iShares U.S. Preferred Stock ETF
iShares S&P US Pref Stock Idx Fnd (ETF) (NYSEARCA:PFF) seeks to track the investment results of the S&P U.S. Preferred Stock Index. It has an expense ratio of 0.47% and an annual dividend yield of 5.65%.
PFF ETF was created in March 2007. Today, it is the largest ETF that specializes in preferred stocks with net assets of over $17.0 billion.
This preferred stock ETF follows a passively-managed indexing approach. The fund generally invests at least 90% of its assets in the component securities of the underlying index and currently owns shares of 291 preferred stocks. PFF ETF may also invest up to 10% of its assets in futures, options, and swaps that the fund manager believes will help the fund track the index.
Note that because financial services companies make up the bulk of the index, this focus on financials is reflected in PFF ETF’s holdings. Right now, Banks, Diversified Financials, and Insurance sectors account for nearly 70% of the fund’s portfolio. The fund’s top three holdings are Wells Fargo & Co (NYSE:WFC-L), Allergan plc. 5.50% Mandatory Convertible Preferred Shares, Series A (NYSE:AGN-A), HSBC Holdings plc PERP SUB CAP SECS EXCH PREF SHS SER 2 (NYSE:HSEB). (Source: “iShares U.S. Preferred Stock ETF,” iShares, last accessed April 4, 2017.)
2. PowerShares Preferred Portfolio
PowerShares Preferred Portfolio(ETF) (NYSEARCA:PGX) is an ETF that tracks the Bank of America Merrill Lynch Core Plus Fixed Rate Preferred Securities Index. It is currently yielding 5.68% and has a management expense ratio of 0.50%.
The underlying index of the fund consists of U.S. dollar-denominated preferred securities issued in the U.S. domestic market. The fund usually invests at least 80% of its total assets in preferred stocks that comprise the index. However, note that although the fund’s holdings are trading in the U.S. stock market, it does include foreign preferred stocks in the form of American Depository Receipts (ADRs).
PGX ETF currently owns shares of 253 preferred stocks with Financials, Real Estate, and Utilities being its largest sectors. The fund’s top holdings include preferred securities from Barclays PLC (ADR) (NYSE:BCS), HSBC Holdings plc (ADR) (NYSE:HSBC), and Wells Fargo & Co (NYSE:WFC). The ETF is rebalanced and reconstituted on a monthly basis, just like the index it tracks. (Source: “PGX – PowerShares Preferred Portfolio,” Invesco Distributors Inc, last accessed April 4, 2017.)
3. First Trust Preferred Securities and Income ETF
First Trust Preferred Securities and Income ETF ETF (NYSEARCA:FPE) is quite different from the preferred stock ETFs we mentioned so far in that it is actively managed. It has an expense ratio of 0.85% and is currently yielding 5.91%. Stonebridge Advisors LLC is the sub-advisor to the fund and actively manages the fund’s portfolio.
FPE ETF usually invests at least 80% of its net assets in preferred stocks and income-producing debt securities, including corporate bonds, high yield securities, and convertible securities. The fund currently holds 183 securities with a weighted average effective duration of 4.07 years.
Approximately 58% of the fund’s investments are in the U.S. The ETF also has exposure to companies in Canada, Europe, and Australia. The top industry exposure of this ETF are Banks (34.47%), Insurance (16.90%), Capital Markets (11.25%), and Electric Utilities (7.18%). FPE ETF’s top three holdings are EMERA INC Variable rate, GMAC Capital Trust I Series 2, and ENEL SPA Variable rate. (Source: “First Trust Preferred Securities and Income ETF (FPE),” First Trust Portfolios LP, last accessed April 4, 2017.)
4. SPDR Wells Fargo Preferred Stock ETF
SPDR Wells Fargo Prfd Stk ETF (NYSEARCA:PSK) is an exchange traded fund that seeks to provide investment results of the Wells Fargo Hybrid and Preferred Securities Aggregate Index.
The index is a modified market capitalization weighted index designed to measure the performance of non-convertible preferred stocks and securities that are functionally equivalent to preferred stocks. These securities include depositary preferred securities, perpetual subordinated debt, and certain securities issued by banks and other financial institutions that are eligible for capital treatment.
As you’d expect, PSK ETF’s fund allocation is very similar to that of the underlying index. Its top three sectors are Financials, Real Estate, and Utilities. Together, these three sectors represent 82.4% of the fund’s holdings. (Source: “SPDR Wells Fargo Preferred Stock ETF,” State Street Global Markets LLC, last accessed April 4, 2017.)
Right now, the fund has an annual dividend yield of 5.44% and an expense ratio of 0.45%. Its top three holdings are preferred securities from HSBC Holdings, PNC Financial Services Group Inc (NYSE:PNC), and U.S. Bancorp (NYSE:USB).
5. PowerShares Financial Preferred Portfolio
PowerShares Fin. Preferred Port. (ETF) (NYSEARCA:PGF) is an exchange traded fund based on the Wells Fargo Hybrid and Preferred Securities Financial Index. The fund has an annual dividend yield of 5.53% and a management expense ratio of 0.50%.
Note that the index is designed to track the performance of preferred securities trading in the U.S. market issued by financial institutions. Therefore, it’s no surprise that the fund’s holdings consist entirely of preferred securities from financial services companies. This means even though the fund has 93 holdings that can mitigate company-level risk, investors of this ETF still face industry-level risk. (Source: “PGF – PowerShares Financial Preferred Portfolio,” Invesco Distributors Inc, last accessed April 4, 2017.)
Usually, PGF ETF invests at least 90% of its total assets in preferred securities that comprise the index. The index is weighted by market capitalization. Right now, the preferred stock ETF’s top three holdings are preferred securities from HSBC Holdings, Barclays Bank, and Wells Fargo.
6. iShares International Preferred Stock ETF
Investors interested in preferred stock ETFs but also want to get global exposure should take a look at iShares International Preferred Stock ETF (NYSEARCA:IPFF).
IPFF ETF seeks to track the investment results of the S&P International Preferred Stock Index. The fund is currently yielding 5.36% and has an expense ratio of 0.55%.
While this is an international ETF, it only includes companies in developed markets. As a matter of fact, the fund’s two largest geographical exposures—Canada and the U.K.—account for more than 90% of its portfolio. Moreover, the index tracked by the fund only includes preferred shares of companies with a market capitalization of over $100.0 million that also meet the minimum liquidity, trading volume, and maturity requirements. (Source: “iShares International Preferred Stock ETF,” iShares, last accessed April 4, 2017.)
Right now, the fund has 100 preferred stocks in its portfolio. The top three holdings of IPFF ETF are preferred shares issued by TransCanada Corporation (NYSE:TRP), Toronto-Dominion Bank (TSE:TD), and Royal Bank of Canada (TSE:RY).
7. VanEck Vectors Preferred Securities ex Financials ETF
By now you have probably noticed that preferred stock ETFs often have a large exposure to the financial sector. And that’s because financial services companies are some of the biggest issuers of preferred shares. For investors that don’t want financial sector exposure in their preferred stock ETF, they should check out Market Vectors ETF Trust (NYSEARCA:PFXF), also known as VanEck Vectors Preferred Securities ex Financials ETF.
PFXF ETF seeks to track the investment results of the Wells Fargo Hybrid and Preferred Securities ex Financials Index. The index is designed to track the performance of U.S.-listed securities excluding those in the financial sector. Note that other than preferred stocks, the index can also hold convertible securities, depository preferred securities, and perpetual subordinated debt that have similar functionalities to preferred stocks.
Right now, the fund holds 113 preferred securities in its portfolio. Its top three holdings are preferred shares from T-Mobile US Inc (NASDAQ:TMUS), Kinder Morgan Inc (NYSE:KMI), and American Tower Corp (NYSE:AMT). (Source: “VanEck Vectors Preferred Securities ex Financials ETF,” Van Eck Securities Corporation, last accessed April 4, 2017.)
The fund has an annual dividend yield of 5.74%. It also has an expense ratio of 0.41%, which is the lowest among the preferred stock ETFs on this list.