PowerShares Financial Preferred Portfolio (NYSE:PGF) is a new ETF that happily addresses the need to capture Preferred Shares in ETF format. Unfortunately, It doesn't do it as well as it could.
Using the information available on their website (particularly the full roster of holdings), I fetched for each holding its annual coupon rate, credit rating (both figures accessible through the excellent, and free QuantomOnline.com) and last closing price (Dec. 4, through Yahoo! Finance). My goal was to come up with a weighted average yield for the fund, as well as its overall credit quality.
The end result is this: PGF's holdings sport a weighted average yield of 6.31%. After subtracting the 0.6% expense ratio, this should amount to 5.71% annual distribution, or yield to fund shareholders. The credit quality ranges from BBB- to A+, and on aggregate is just about A or A-.
The $64,000 question is of course: How does this compare with the alternatives -- Closed-end funds like Flaherty & Crumrine/Claymore Preferred (NYSE:FFC), John Hancock Pref. Income Fund (NYSE:HPF) and Blackrock Prefered Opportunity Trust (NYSE:BPP)? The answer is: not too favorably, for the following reasons:
- It's not adequately diversified. It holds only 24 issues (even though they say "approximately 30" on the fund page), and even that is misleading: They hold multiple series of the same issuers (4 from dutch giant ING, 3 from Aegon), which means one default could really hurt. I can't understand why Powershares chose this particular Wachovia index to track, when they could have easily picked one of the broader ones. They've licensed the entire family.
- It doesn't yield much, when you compare it to the CEF's available. Granted, it does have better credit quality, but not by much. The BPP fund, for example, despite it's 1.26% expense ratio and 6% premium, still yields 7.59% - a lot more than PGF.
- It holds exclusively fixed rate preferred. The exclusion of Floating rates is baffling, given that investors are looking for a broad index, not a particular theme.
Full Disclosure: Author is long FFC