Josh Betts

PowerShares' Preferred Stock ETF Just Doesn't Stack Up

As an employee and portfolio consultant for PowerShares I felt the need to express a couple other thoughts on this comparison for it to be fair.

An important factor that needs to be considered when evaluating securities is their tax consequences. Roughly ½ of fund investments reside in a qualified account, however, this still leaves the other ½ vunerable to inefficient tax managed funds. It should be noted that when comparing the yields of closed-end funds to the PowerShares Financial Preferred Portfolio (ticker PGF), one of the main filters in determining which securities are eligible for inclusion in the fund is that the dividends paid by the preferred stocks must be 100% qualified dividend income eligible. This significantly improves the after-tax yield of PGF in a taxable account, which is what investors are ultimately concerned with, as this is how much ends up in their pocket. Also, while closed-end funds can offer some upside appreciation potential when purchased at a discount, they are also subject to the risk of trading at an even greater discount to their NAV. Exchange-traded funds however, tend to trade at or near their NAV prices as specialist are able to create and redeem shares with the fund in larger blocks of 100,000 shares. This helps to address the supply/demand of shares and helps ETFs to trade much tighter to their NAVs.