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On Thursday, State Street launched the SPDR Wells Fargo Preferred Stock ETF (NYSEARCA:PSK), an ETF that invests in non-convertible preferred stocks. The new SPDR will compete with two existing products from iShares and PowerShares, both of which have been incredibly popular among investors through the first three quarters of 2009.

Preferred stocks are an attractive investment option for several reasons. They feature the regular distributions of fixed income investments, but allow investors to participate in upward price movements in a company’s share price, making them a hybrid of stocks and bonds. Preferred stockholders generally have priority over common shareholders in bankruptcy proceedings, although they must line up behind a company’s debtholders.

While the three preferred stock ETFs now on the market offer exposure to a similar group of securities, they are not identical by any stretch. With approximately 160 underlying holdings, PSK invests in significantly more securities than either PGX (67) or PFF (90).PSK and PGX limit their holdings to securities rated at least investment grade, while PFF invests in several issues rated below BBB- (speculative-rated preferred issues account for nearly 30% of PFF’s assets, likely responsible for a large portion of the YTD return gap relative to PGX). PSK also limits its holdings to non-convertible securities, a restriction not listed in the prospectus for either PGX or PFF.

Regardless of their nuances, all preferred stock ETFs have been very popular in 2009 as investors look for ways to gain exposure to lower risk equities. PGX and PFF have combined cash inflows of more than $1.3 billion through the first eight months of the year, and now have a combined market cap of nearly $3.4 billion.

PowerShares also offers a Financial Preferred Portfolio (NYSEARCA:PGF) that invests in preferred stocks of financial institutions in the U.S. PGF includes approximately 30 underlying holdings from companies like Bank of America, Barclays, and Wells Fargo, and is up more than 18% in 2009.

The potential for expansion in the preferred stock ETF space remains even after the launch of PSK. Similar to corporate bond ETFs, we are yet to see the introduction of more targeted ETFs (with the exception of PGF) offering exposure to specific maturities, sectors, and credit qualities.

As ETFs continue to catch on, particularly among fixed income investors, don’t be surprised if we see more preferred stock funds hitting the market.

Disclosure: No positions at time of writing.

Source: Preferred Stock ETFs Still Attractive