Barclays Launches New 'Preferred Stock' ETF - How Preferable Is It?

Barclays Global Investors has launched a new preferred stock exchange-traded fund on the American Stock Exchange. The iShares S&P U.S. Preferred Stock Index Fund (AMEX: PFF) provides access to high-yielding securities, and is the second such fund to come to market.

Preferred stock is a hybrid security that exists somewhere between common equities and corporate bonds. This class of stock typically pays a high, fixed dividend, which is paid before any dividends are paid to regular investors; the stock usually has low volatility as a result. Preferred securities typically yield more than corporate bonds, although they are lower on the totem pole in case of a default. Investors typically use them as a way to boost the income payouts from a portfolio.

PFF is the second preferred stock ETF to hit the market, following the December 1, 2006, launch of the PowerShares Financial Preferred Portfolio (AMEX: PGF). That fund has gathered $85 million in assets, and charges 70 basis points in expenses. It holds 26 securities from 18 issuers, all focused on the Finance sector. It is tied to the Hybrid & Preferred Securities Financial Index.

PFF is slightly more diversified, but only slightly. It holds 29 securities from 24 issuers, and has “only” an 81.5 percent exposure to Financials.

The real question that investors will want to know when comparing the two funds is which leads on yield, and unfortunately, neither fund openly discloses that number on a real-time basis. In 2006, however, the S&P Preferred Stock Index outperformed the index that underlies the PowerShares fund, delivering 8.49 percent returns vs. 6.32 percent for the PowerShares fund. Then again, over the past three years, the Wachovia index has the slight lead.

Ultimately, deciding between the two will be a matter of a careful balancing of risks. The iShares fund is significantly cheaper and manages to diversify away from the Financials a bit. Then again, its largest holding is from Ford Motor Company (9.44 percent), which could give some investors pause.

The prospectus is available here (pdf file).