Time For Preferred ETFs?

However, while the companies have the obligation to pay interest on the bonds that they issue, the dividend on a preferred stock can be suspended or deferred by the vote of the board.

Preferred stocks generally have a low correlation with other income generating segments of the market like REITs, MLPs, corporate bonds and TIPs. However, unlike bond prices, these are also sensitive to downward changes in interest rates. If interest rates fall, issuers have the option to call shares and reissue them at lower rates (see all Convertibles/CEFs/Preferred Stock ETFs).

Whatever the case, investors intending to tap this segment may play the below-mentioned ETFs.
 
PowerShares Preferred ETF (PGX)
 
The fund holds a portfolio of 218 preferred stocks in its basket, tracking the BofA Merrill Lynch Core Plus Fixed Rate Preferred Securities Index. It charges 50 bps in fees.
 
Financials (86.3%) dominates this fund followed by utilities (6.1%). With the 30-day SEC payout yield of 5.78%, the fund, too, is a solid income destination. It touched a 52-week high on January 4 and advanced 2.7% in the last three months (as of January 4, 2015).
 
PowerShares Financial Preferred Portfolio (PGF)
 
The fund tracks the Wells Fargo Hybrid and Preferred Securities Financial Index, managing a fund size of $1.67 billion. Holding 86 preferred stocks in its basket, the fund provides an exposure to U.S. listed securities issued by financial institutions. The fund charges 63 bps in fees.
 
The fund has a notable 30-day Sec yield of 5.63% and an effective duration of 5.41 years indicating moderate interest rate risks. Like PGX, PGF too hit a 52-week high on January 4 and added 3.4% in the last three months (as of January 4, 2015).
 
iShares U.S. Preferred Stock ETF (PFF)
 
The fund is the most popular preferred stock ETF in its space with an assets base of around $14.3 billion. The fund has an attractive payout, with the 30-day SEC yield at 5.34%.
 
PFF tracks the S&P U.S. Preferred Stock Index, holding 286 securities in its basket.More than 60% of the fund assets are allocated toward financials (banks, financial services and insurance). The fund charges 47 basis points as fees to investors. It was up 0.9% in the last three months.
 

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