The asset classes have expanded in the recent years with the growth of the ETF industry.
Amongst the many innovative ETF products, preferred ETFs or preferred stocks ETFs as they are more commonly known, are of importance and interest with some investors. Such ETFs have been a preferred financing source for many companies since a very long time and many do not consider it an innovation in the financial industry.
Preferred ETFs are impacted by both stocks and bonds. They are senior to the common stocks but not to debt instruments. The fixed income prices and interest rates are inversely proportional in this case which means that as income prices rise the interest rates fall. Also the prices of these ETFs are impacted because of the option of converting to common stocks ETF. As the equity prices rise, the option increases in value giving more favor to the common stock option.
The trading markets however at some points may be far less active than that of common shares. This impacts the liquidity of the preferred stock and makes it harder to sell in the market. With these factors they have been slow to catch in the ETF market. These funds have delivered a relatively strong performance in the past years. Some have experienced aggregate cash inflows of more than $2.2 billion through their introduction in the first year. Read more
PowerShares Financial Preferred Portfolio (PGF)
Amongst the most popular preferred stock ETF option is the PowerShares Financial Preferred Portfolio (PGF). This tracks the Wachovia Hybrid & Preferred Securities Financial Index and maintains around 30 holdings including preferred stock issued by Bank of America, Wells Fargo and JP Morgan Chase.
PowerShares Preferred Portfolio (PGX)
PowerShares has also offered a more lightly diversified preferred ETF, the PowerShares Preferred Portfolio (PGX). PGX tracks Merrill Lynch Fixed Rate Preferred Securities Index and maintains over 65 holdings. Many of the holdings are in the financial sector which is about 85%. It hasn’t performed well than PGF but still is a good option to consider.
iShares S&P US Preferred Stock Index ETF (PFF)
iShares S&P US Preferred Stock Index ETF (PFF) is dominated by holding in financial companies. This preferred ETF is the largest in the market with an average daily volume of about 1 million shares. It has a market capitalization of more than $3 billion and holds securities from companies like Archer Daniels Midland and other real estate investment trusts. PFF experienced a downfall in 2008 by losing nearly 60% of its value but since then it has been performing well and has gained more than 180% of its value. Many preferred stocks have gained after the recession period.
SPDR Wells Fargo Preferred Stock ETF (PSK)
SPDR Wells Fargo Preferred Stock ETF (PSK) focuses on many stocks from the financial sectors but is also holding securities from other industries like AT&T, Comcast and General Electric.
This corner of the ETF industry has experienced growth because of the investors wanting to gain exposure to the hybrid asset class. The four preferred stocks available to the US investors accumulate total assets of $6.2 billion. This is because of the stellar returns and the waves of cash inflows. Preferred stocks together with preferred ETFs are continuing to climb as yield interested investors are more comfortable with alternative investment options.